UK is leading real estate debt ‘evolution’

The UK is leading an evolution in real estate debt, according to latest figures from the European Association for Investors in Non-Listed Real Estate Vehicles. INREV’s 2022 Debt Vehicles Universe study, shows that the European non-listed real estate market has grown steadily to 98 vehicles with a total target equity of €60.3bn (£52.2bn). Over the last seven years, vehicles have more than doubled in number and size. As Europe’s most developed non-listed real estate debt market, the UK is leading this, INREV said. INREV director of research and market information Iryna Pylypchuk said: “The expansion of the European non-listed real estate debt market is providing a more diverse choice of funding and healthy competition to traditional lenders. Confirming this growth, we are now starting to see the first signs of regulatory involvement. “The European real estate market is under huge pressure to decarbonise and traditional lenders are broadly on the sidelines when it comes to retrofit lending. The biggest question is to what extent will the non-traditional lenders fill a funding gap, especially when it comes to an ESG-focused debt proposition.” The view is supported by the recent Bayes UK Commercial Real Estate Mid–year 2022 lending report which revealed that, at 38%, non-bank lending in the UK had surpassed that of banks and building societies for the first time on record. INREV said that 85.1% of the total equity in its study was concentrated in closed end vehicles, with 64.3% focused on a senior loan debt strategy. The number of closed end vehicles has more than doubled from 37 in 2016 to 80 in 2022. Liquidity concerns, at least in part, explain their dominance, especially given the relatively small size and immaturity of the European non-listed debt market. This is also reflected in the proposed revisions to Alternative Investment Fund Managers Directive, which stipulate that a debt fund originating more than 60% of its net asset value in loans must have a closed end structure to avoid liquidity mismatches. Three quarters of the 80 closed end vehicles have a provision to extend their termination date, which provides comfort as a risk mitigating mechanism in the event of significant market correction or change in investor sentiment. Senior debt funds make up the largest share, accounting for 54 of the 98 vehicles and €38.8bn of the total target equity. In terms of loan generation, relatively few vehicles target a pure loan acquisition strategy. Combined, mixed loan generation strategies and direct lending dominate with 83 vehicles and €54.3bn in target equity, representing 84.7% and 90% of the respective totals. Vehicles with mixed loan generation strategies are the largest with an average target equity of €880m. The average size of those focused on loan acquisition strategies and direct lending is €690m and €490m, respectively. Multi country vehicles account for 70.1% and dominate new fund launches. At €840m, the average size of these vehicles is double that of an average single country peer at €420m. However, of the 46 vehicles with a single country strategy, 36 focus on the UK, where the average fund size stands at €470m. INREV said: “This is substantially larger than for vehicles focused on any other single European market, where the average size is €170m.” Only 15 of the vehicles follow a single sector strategy and these are small at around €180m on average. Of these, 12 are focused on residential. Over the last three years, 10 newly launched vehicles were added, with combined target equity of €6.78bn, accounting for 11.2% of the overall total. Eight of the 10 vehicles follow a multi country, multi sector strategy and the remaining two are single country, multi sector funds with a focus on the UK. Pylypchuk added: “In theory, there is plenty to be enthusiastic about. However, the test now is to see whether the segment will continue to sustain investor appetite. Will it become more streamlined, or might it become more fragmented?” To send feedback, e-mail piers.wehner@eg.co.uk or tweet @PiersWehner or @EGPropertyNews Image © REX/Shutterstock