Now it could be a good time to invest in debt, delegates heard at Real Asset Media’s European Debt Finance & Investment Briefing, which was held online this week.
‘I think debt provides investors with what they need at this point in time,’ said Anthony Shayle, independent consultant. ‘The debt investment environment represents an opportunity for investors to select risk/return characteristics that provide a premium to the fixed income model and a volatility dampener against the real estate model’.
Delegates’ views were equally clear. A snap poll conducted by Real Asset Media revealed that 71% of respondents believe it is a good time to invest in real estate debt, with only 29% disagreeing. When asked to rank on a risk-adjusted basis, 63% of delegates stated they prefer debt to real estate equity.
‘The poll is right, because investors are on the hunt for yield,’ said Shayle.
Debt also offers some protection. ‘There is strong interest cover due to low interest rates and lower leverage overall so it’s a better place to withstand the current situation than it was in the GFC,’ said Emma Huepfl, Managing Director, European Credit Strategies, CBRE Global Investors.
‘If you are coming into debt now you’re coming in off a lower valuation basis and you’ve got a cushion to withstand further valuation shocks,’ she said. ‘So I think that debt does offer protective characteristics in this environment’.
However, calling debt a safe haven is a stretch.
‘Safe haven is a misnomer for the asset class as a whole, as debt carries a whole range of returns from 2% to 20% plus,’ Huepfl said. ‘Right now I think there is good value in core senior. The sad fact is that money will be lost on some well-structured and well-underwritten deals in this cycle and no asset class is going to be entirely immune’.
Interest will tend to focus on the primary market while the secondary market suffers.
‘There is definitely liquidity in the market and an interest in buying into loans with a focus on the primary market, but the impact on the secondary syndication market has been quite intense,’ said Norbert Kellner, Head of Syndication, Berlin Hyp.
It is also important to consider the implications of negative interest rates for real estate debt specifically, now that the Bank of England has said it could use them as part of their policy as has happened in Europe.
‘There is a floor of zero that’s implicit in UK real estate debt,’ said Jonathan Lye, Director, Auxilium Financial Risk Management. ‘Now that floor is in doubt, the question about investing in debt is whether it will be worth less than you invested and there’s uncertainty over what value will look like’.
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