Real estate debt is a growth market in Germany. This is confirmed by a study on the investment behaviour of institutional investors conducted by RheinMain University of Applied Sciences in cooperation with CAERUS Debt Investments AG. 54 managers from pension funds, credit institutions, insurance companies, pension funds and family offices, among others, took part. Although real estate debt has so far only been weakly represented in the portfolios of most institutional investors, around a third of those surveyed would like to expand their activities in the future. Currently, the ratio of this asset class is on average 1.6 percent of the total portfolio.
A third of the participants want to invest more
Those who want to expand their activities in the next one to three years consistently cited volumes of more than 75 million euros as the order of magnitude. On the other hand, 41 percent are not planning to invest new in this asset class, as well as a good quarter that has not yet made up their minds.
The authors of the study, led by Prof. Dr. Bernd Wieberneit, Professor of Investment and Asset Management of Real Estate at the RheinMain University of Applied Sciences in Wiesbaden and Patrick Mutt, have predicted what this could mean for the next 36 months: With pessimistic assumptions, the volume of new investments in real estate debt in the market of the DACH region would be around EUR 1.1 billion, in the realistic case around EUR 2.3 billion and in the optimistic case around EUR 3.7 billion.
The most important driver is the risk-return profile
When asked about investors’ motivation for investing in real estate debt, the balance between return and risk of the investment is cited as the most important driver (4.31 out of 5 possible points). “Similar to a core investment, exposure to real estate debt offers a secured cash flow profile, low volatility and a weak correlation to other asset classes such as the bond and equity markets. On the yield side, senior secured real estate loans reach or exceed the level of riskier asset classes such as high-yield corporate bonds, and this with a lower risk due to the collateralization,” the study says.
The second most important motivation of respondents to invest in real estate debt after the risk-return profile is the demand for debt capital, which follows directly from the financing gap. On a scale of 1 (“insignificant driver”) to five (“main driver”), the value for the study participants was 4.
According to the results of the study, investors prefer whole loans as the capital structure of the loans granted, with interested parties expecting an average gross IRR of 8.0 percent p.a. and accepting a median loan-to-value ratio of 70.0 percent. The dilemma is that the required interest rates can hardly be paid by properties in the core segment. Expected returns call for properties with a higher risk profile, such as value-add repositioning or project developments with pre-letting, whose project yields generate a higher interest rate on borrowed funds.
Back leverage is (still) viewed skeptically
One way to achieve the required return without higher property risk is to use debt capital at fund level, so-called back leverage. The respondents are still showing significant reluctance here. Only twelve percent of those surveyed are already using back leverage, and a further three percent are planning to implement it. On the other hand, 67 percent do not intend to use it in the coming years. The main obstacle is seen as an associated increase in risk (37 percent of respondents). In addition, the market for these structures is not yet mature or corresponding standards are lacking (19 percent). In addition, the structures are too complex and require additional reporting (13 percent).
“The preference for priority structures, the current disproportionate pricing of risk and the reluctance to use leverage at fund level confirm the priority of security and portfolio resilience in investment decisions,” says Markus Kreuter, COO of CAERUS Debt Investments: “However, the required return is hardly achievable with defensive portfolio financing in the current market environment. Supply and demand are currently not coming together here.” As a way out, 60 percent are considering financing project developments. Another alternative could be to dispel investors’ concerns in the context of back leverage through suitable structures.
On the demand side, real estate debt in Germany is thus presenting itself as a supplement to classic bank loans for the time being. “Real estate debt ideally comes into play when the property just doesn’t fit into the banks’ financing grid. Be it in the loan-to-value ratio, be it a transformation object that is to be repositioned in the direction of ESG if there is a letting issue or a change in the type of use,” says Matthias Thomas, Business Development & Client Relationschips, CAERUS Debt Investments AG.
