For real estate investors, credit strategies jumped to the top of priorities when the relative attractiveness of debt and equity began to shift following the sharp base rate increase two years ago. Managers that didn't previously have real estate debt strategies launched new products to meet investor demand for credit, and those that already had lending doubled down on their debt fundraising efforts. The result? In 2022, credit funds raised the largest share of annual real estate capital in the past five years, according to PERE data.
However, this growing momentum for debt strategies was overshadowed by a sharp decline in total capital commitments to private real estate funds last year, with institutional investors constrained by weak performance, limited liquidity and the impact of denominator effects on their portfolios. This means that while debt fund market share remained consistent with recent years, actual total capital raised was down 42% year-on-year.
But the largest real estate credit managers are holding strong, with PERE's Real Estate Debt 50 slightly surpassing its five-year fundraising total for the second year in a row. Last year's RED 50 saw a total of $267 billion raised for real estate credit strategies over the period covered (itself a notable 19% increase from the previous year). This year's RED 50 total is $275 billion.
While this 3% increase may seem insignificant in comparison, given that overall private real estate funding will experience its lowest level in 11 years in 2023, this statistic is significant and demonstrates that demand for private real estate credit remains robust even in a severely capital-constrained environment.
However, a closer look at the survey results reveals clear regional differences in how large managers have responded to a tough fundraising environment, and while the top 10 firms maintain their strong market positions, not all of them have increased their total fundraising volume over the past 12 months.
Despite impressive growth, even the current darlings of private real estate strategies are not immune to the toughest financing markets in years.