Will it be good to bet your real estate money on debt in 2016?

Savvy investors with money to spare and a particular interest in real estate may have issues investing their spare cash. This year, prices for high-end properties have gone up. The solution might be focusing on private property debt funds; they might take the place of official institutions and banks as far as lending to luxury commercial properties is concerned. Main markets targeted are in New York, London and Tokyo. Debt funds in real estate seem to have a crystal-clear answer for top-tier investors in today’s realty market – they might know where to find a good deal. Expected returns on debt funds are between 8 and 10%.picture1


Property debt funds

Investment strategists argue that there’s an opportunity for 2017 in real estate. They strongly believe that it might be better to remain on the debt side of things, rather than focus on the physical assets. There’s a reason behind the shift, namely real estate prices that have risen a lot since 2009. The HSBC has been an important part of the journey; the company has been purchasing properties for its clients in the cities of London and New York, which are prime real estate markets.

Nowadays though, the better deals might be in debt and they center mostly on developers enthusiastic about re-financing or building high quality properties. Knowing the ins and outs of the market, as well as understanding debt has made experts believe that there’s great potential in real estate debt.

Direct investments are still attracting high-end investors

Clients who are income focused and defensive are still fond of private property debt funds. That’s mainly because they have the ability to invest in bonds, and buy or sell bonds because they generate higher profits and have more potential. However, not all investors are defensive. Residential and commercial real estate in the US remains interesting, but only because the potential returns are less “sophisticated” than they used to be 5 years ago.

Asian investors have turned their attention to distress properties in major European cities, due to the equity and debt investment potential of these cities. Furthermore, these investors are also fond of real estate in Australia and Japan as well, even though they’re very wary of the currency overview. Most investors are attempting to have a balanced range when it comes to single asset purchases; their goal is to watch out for a more sensible and plain debt, and stay away from risks.picture2

Bank loans are replaced by real estate debt funds

Private debts funds are an excellent form of investment because banks have become more cautious about loans since the 2008 global financial crisis. Tighter capital regulations have left them with no choice. Also, there’s a shortage of mortgage-backed securities in the commercial property environment. This factor alone has been helping the lending market quite a lot in the recent years. The situation is better known as “capital scarcity” that apparently has become even scarcer amid the present volatility in the realty market at a global scale.

Fund surges and fundraising efforts

Back in 2014, there was a surge in funds as nearly $25 billion was gathered at a global scale. According to a private equity business known as Preqin, the amount slide back to $14 billion in 2015. The market’s size varies from one year to another, and it usually depends on one big fund. There’s a shift happening in the property debt fund environment. Officials are currently originating loans as opposite to raising cash to take down legacy loan portfolios.picture3

Banks are an important part of the loan business, but then again they’re not the most important. For the most part, banks play a key role in the financing part of a loan. In layman’s terms, private debt funds are better known as originating loans as they have the ability to set the terms for other lenders in the same group. Banks no longer have monopoly over lending terms, because now there are many institutions that aren’t banks that can offer better deals to savvy investors.

Investors might also consider investing in debt funds as a means to purchase high-quality, but rather illiquid bonds; which might require up to 10 years to have any value.

By Fredrick Cameron and PropertyTurkey.com!