AsianInvestor - APAC institutional investors gravitate to real estate debt

SINGAPORE, Mar. 27 2024 / AsianInvestor / – Institutional investors in Asia Pacific are piling into real estate debt in place of direct equity investing, as asset managers and alternative credit providers in the region expand the range of products to meet the new demand.

In the face of falling valuations in real estate markets, and the rising cost of finance needed to make direct real estate acquisitions, real estate debt has become increasingly important allocation target for investors, Neil Brookes, global head, capital markets, Knight Frank told AsianInvestor.

“Considering the rising high interest rate environment, investors are increasingly looking to reallocate some of the capital towards debt investing to seek diversification and stability as debt strategy is a lower risk alternative to shield them from market volatility and provide downside protection,” he said.

The growing vogue for debt investing comes at a time when many real estate markets around the world show falling valuations, as the correction in prices, led by REITs spreads to less liquid property funds and investors’ own direct investments.

Allocation Plans

Andrew Thompson, head of private equity, at KPMG Asia Pacific in Singapore told AsianInvestor that family offices and UHNWIs are a valuable element of the new demand.

“The family groups in Asia are typically less concerned about asset level security than the banks, who – in part because of the pressure from greater regulation – have become more cautious about lending. This has combined with an explosion of money and assets of wealthy families looking to find return,” Thompson told AsianInvestor.

Keith Ong, co-founder and chief executive officer of Singapore-based real estate platform RealVantage said that investors were expanding allocations and moving up the risk spectrum as they became more comfortable with the asset class.

“For example, a South Korean pension fund started investing in real estate debt funds 5 years ago and has now evolved into separate individual loan deals and joint ventures or club deals. We see equal interest levels from both Asian and non-Asian investors going into debt strategies,” Ong told AsianInvestor.

More sophisticated investors are open to investing in mezzanine loans as they understand the risk profiles. Those who are new to real estate debt strategies would usually invest in senior loans or a debt fund,” he added.

The comments come in the wake of two investor surveys revealing plans for investors to increase allocations to real estate debt in the next two years.

The investment intentions survey 2024 Asia Pacific, published by the Asian Association for Investors in Non-listed Real Estate Vehicles (ANREV) in mid-January, found that over the next two years a higher proportion of investors into Asia Pacific real estate will increase their allocations to real estate debt and separate accounts than any other sector (as measured by AUM), with 44% favouring this route.

“Private debt appears particularly attractive to investors in a high interest rate environment with lower risk and attractive risk-adjusted returns,” the report authors noted. 

The result echoed those from CBRE’s 2024 Asia Pacific Investor Intentions Survey, also published in January, which polled more than 510 investors across the region in November and December.

It found that between 2022 and 2024 real estate debt went from the fourth most popular alternative real estate sector for the year ahead in Asia Pacific, behind data centres, cold storage, healthcare and retirement living, to the second, behind healthcare.

Korean Lead

Koichiro Obu, head of real estate research, Asia Pacific, at DWS pointed to Korea as and Australia, as locations where investors were eying opportunities in real estate debt.

“We see the most compelling debt opportunities in South Korea, as maturing real estate debt is expected to peak in 2024 with an immediate need for new lenders to step in and ease constraints in the credit markets," Obu told AsianInvestor.

"The Australia debt market looks interesting as well, though new entrants need to calibrate their plans carefully given the more competitive landscape from existing alternative lenders while risks in the construction space remain high amid record bankruptcies,” he said.

Research by DWS shows that, while equity investment activity remained weak, real estate lending comprising both asset-based and construction loans by alternative lenders grew significantly in South Korea in 2023.

Obu noted that deal size, which was concentrated in the office and logistics sectors, varied from KRW 45 billion to KRW 900 billion with typical interest rates between 5.5% and 10%.

About RealVantage

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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.