The rush for 'relative returns' is driving investor interest in debt funds, according to Anthony Shayle, head of global real estate - UK debt at UBS, speaking at PropertyEU's recent European Debt Finance and Investment Briefing in Frankfurt.
'The main driver is how investors can allocate into a market that provides better relative returns to government or corporate bonds. Can they find a place where they can allocate from the real estate pot to a lower volatility asset within the real estate sector? I think those are the key sources of investor equity into these funds,' Shayle said.
Today, most institutional investors pump between 80% and 90% into traditional real estate assets, allocating just 10% to 20% to alternative asset classes, said Shayle, who notes that they are looking at ways to boost that allocation. Subsequently, interest in such assets, including debt funds can only increase. Nonetheless, as Shayle pointed out, alternative debt funds account for just 5% to 9% of the lending market in the UK. ‘If you add on the insurance companies who have been at it for a very long time, you get up to 19% of the entire banking market,’ he said.
However, that could change, according to Sascha Klaus, a board member of Hypothekenbank Frankfurt, a unit of Commerzbank: 'I don't think 'alternative' is a bad label,' he said. 'I think we'll see it more and more in Europe because the regulators are also driving it. If you compare Europe to the US, around 20% of lending is on banks’ balance sheets in the US. In Europe, it's the other way round – it's almost 80%. In my opinion, the regulator in Europe is basically trying to move towards a situation like in the US, whereby much more is done in the capital markets and not on banks' balance sheets in order not to run the risk of having to bail them out again.'
And 'as long as the money is as cheap, the ride will continue', Klaus said, because 'the money has to go somewhere'. Daniel Mair, a partner in Ernst & Young’s German restructuring practice, agrees: ‘The market is stable at the moment and will remain that way until something comes round the corner that no-one is expecting. I don’t think the next crisis will look anything like the last crisis. I think we could have another 10 good years for real estate and real estate finance, in Germany, especially. The macro trends are working in favour of the market.’
In addition, lessons have been learnt from the last crisis, said Klaus. 'It's not as crazy as before the last crash – people are more cautious. Banks have more diversification and the portfolios are more robust. There’s much more risk distribution.'
