Today's challenging macro environment is forcing investors around the world to seek assets that generate stable income, defying both high inflation and high interest rates.
Real estate debt is increasingly being seen as such a solution, recognized for its ability to deliver uncorrelated returns in a diversified portfolio.
The level of safety of a real estate loan depends on how each loan is structured. Andrew Gordon, head of real estate lending at Invesco, gives the example of a 65% LTV real estate loan: “In theory, if that asset falls in value by a third, it has no impact on your return at all. Whereas if you compare that to equities, obviously if it falls in value by a third, your capital falls by a third.”
Depending on how the debt is structured, the yield on a floating rate loan can fluctuate in line with the underlying reference rate, providing a hedge against inflation.
“If economic theory works, that base rate will reflect inflation, at least directionally, if not quantum-wise,” Gordon adds. “For example, in theory, higher inflation will lead to higher interest rates and higher profits.”
No more free lunches
In real estate lending, it is no longer necessary to select an LTV by ensuring that the weighted average lease term is longer than the loan term.
“To ensure assets remain resilient going forward, you need to actually guarantee your market, assets and business plans. Broad risk metrics such as LTV are not enough,” Gordon explains.
The risk characteristics of each loan will always be different as the underlying real estate differs. Without a thorough understanding of the macro and micro factors that influence occupational and investment supply and demand trends, you cannot effectively select or structure loans that fit your investment strategy.
“We are addressing this through our open-end fund. This is a core senior debt whole loan fund that we see not as a short-term opportunity but as a long-term opportunity for investors looking to earn attractive and stable returns.”
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