Debt levels in non-listed property funds reach peak - INREV

Gearing in Europe's non-listed real estate funds industry has risen steadily since 2000, reaching a probable peak in the third quarter of last year. But it is still too early to tell what the implications of this record level of debt are for the industry as the global credit crisis continues to unfold, according to the latest Quarterly Research Report from the European Association for Investors in Non-listed Real Estate Vehicles (INREV).

The study shows that core funds have seen the largest rise in gearing levels since 2000 and were up by an average of 11.84% points to just below 50%. This is compared to leverage within value added funds over the same period which rose by an average of 9.6% to 66.1%. This has resulted in a declining gap in relative levels of gearing between the two investment styles as core funds have increased risk levels by taking on more gearing.

The report also found that real estate funds diversified by sector and country also had higher target gearing rates than those specialised by sector or country.

'There has been a clear upward trend in levels of gearing in core and value added non-listed real estate funds since 2000. This is partly a reflection of the low cost of debt over this period and also reflects the growing confidence in using leverage by this rapidly maturing industry,' INREV Research Director Andrea Carpenter commented.

However, as the credit crunch is setting in it will be interesting to see how far these averages fall this year. We are now hearing from fund managers and bankers that the balance of power is back in the hands of the lenders, who are closely monitoring performance and who add that managers with a short track record will find it more difficult to source financing, she added.

A group of fund managers and bankers interviewed in conjunction with the INREV research concluded that the biggest concerns about funds current gearing levels were not focused around cash flow risk on assets, but problems with portfolios existing debt levels beginning to breach agreed loan-to-value ratios as capital values start to fall.

The research was based on a sample of 179 funds from the 476-strong INREV's Vehicles Database. The database has expanded rapidly and now includes fund vehicles with a gross asset value (GAV) of EUR 336 bn, reflecting the strong growth in the underlying industry over the last 10 years.