EUROPE – Redington is advising its pension-fund clients to allocate to European property debt after concluding a sufficient number of managers were operating in the space to make it a viable asset class.
Manager research analyst Kate Mijakowska told IP Real Estate that European commercial real estate debt represented a relatively new opportunity, with a sufficiently attractive risk/return profile created by the recently widened imbalance between demand and supply, the imminent maturity of 2005-08 vintage debt and the regulation-driven retreat of banks.
But she added: "It is only now that we see a sufficient number of asset managers [with combined real estate and fixed income expertise] operating in the space to allow pension schemes to access commercial real estate loans directly."
Although Redington had previously been active in illiquid asset classes – including infrastructure debt – this is the first time it has advised clients to explore commercial real estate debt.
Mijakowska said the response from pension schemes and insurers to the recommendation so far had so far been "very positive".
However, she cautioned the advice applied only to investors with significant portfolios because individual loans tend to be sizeable and investors' need for diversification.
"The illiquidity budget needs to be sufficiently large to accommodate the investment," she said.
Large investors are also less likely to need to allocate a riskier end of that spectrum in order to match against their liabilities.
"Given that the macro picture in Europe is still relatively unclear, at this time we would favour staying relatively senior in the capital structure, although it's important to recognise that the underlying property for each loan requires individual analysis," said Mijakowska.
"One particular mezzanine loan might actually be less risky than senior debt secured against a less appealing property."
Moreover, she said the focus should be on debt secured against properties in core locations – the UK, France and Germany – because of systemic and legal risks in peripheral European lending despite a potential spread pick-up.
Redington for the time being has ruled out advising investors to allocate to a CMBS market weakened by "skin in the game" regulations requiring the sponsor to retain a significant equity slice of any CMBS originated on its balance sheet.
"We would reconsider the asset class [in the unlikely event of a considerable revival], but, under current market conditions, direct lending is more attractive because of the spreads, the influence that the asset manager has on deal structuring process in the primary market, and an attractive illiquidity premium," said Mijakowska.
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