By Ian Withers
LONDON (Reuters) – Some of the world's biggest investors are digging deeper into commercial property lending in a bid to grab market share from withdrawing banks and put an end to the steep fall in property prices.
U.S. fund firms PGIM, LaSalle and Nuveen, Canada's Brookfield and QuadReal, Britain's M&G, Schroders and Aviva and France's AXA all told Reuters they plan to increase their credit exposure to real estate.
Most banks are focusing on lending to logistics, data centers, multi-family rentals and the premium office market, as the sector continues to struggle across the board, limiting capital inflows.
“Our most promising investment right now is probably real estate debt,” said Isabelle Semama, head of AXA's 183 billion euro ($198 billion) alternative investments division.
LaSalle Investment Management, which manages $89 billion in assets globally, said it aims to increase its real estate debt investments, including retail, hospitality and student housing, by 40% over two years to about $7.6 billion.
Betting on real estate loans is not for the faint of heart: The global commercial real estate industry, particularly the office sector, is still mired in its biggest downturn since the 2007-09 financial crisis.
But alternative lenders believe the worst may be over and they could generate attractive returns as valuations recover.
“Historically, if you look at real estate market cycles, loans made at the bottom of the cycle generally tend to have the lowest delinquencies and the highest spreads,” said Jack Gay, head of global debt at Nuveen.
Prized Open
The fund house said strict capital rules for banks, including new international standards known as the “Basel endgame”, and the collapse of several U.S. regional banks have opened up markets further.
“The challenges that banks are facing have really led to a decline in direct lending to commercial real estate,” said Nayla Flake, managing partner in Brookfield's real estate group, which sees an opportunity to grow lending.
Private equity firms are also getting involved. Apollo Global Management launched its first European real estate bond fund this year, targeting 1 billion euros, according to people familiar with the matter.
The asset-management arms of big banks are also targeting this market. Goldman Sachs Asset Management said Monday it had closed its largest real estate credit fund to date, with more than $7 billion in lending capacity, including some of the firm's own capital and leverage.
The story continues
Non-bank financial institutions will account for 41% of property loans in the UK in 2023, more than double from 19% just nine years ago, according to data from Bayes Business School. It also showed that new commercial property lending in the UK has hit a 10-year low.
Bays said the rate has been steadily increasing across continental Europe to between 20 and 30 percent.
The expanding role of investment funds in lending – so-called “shadow banking” – has concerned regulators, raising concerns about default and contagion risks. Reporting requirements for private funds are also looser and less transparent than for banks.
European Central Bank Vice-President Luis de Guindos said in March that non-bank exposure to commercial real estate was one of the main risks to financial stability in the region.
“It's quite worrying that (invested) pension funds are being impacted and that funds are being allowed to do whatever they want with no oversight,” said Nicole Lax, a senior fellow at Bayes.
(1 dollar = 0.9256 euros)
(Reporting by Ian Withers in London; additional reporting by Matt Treacy in New York; Editing by Tommy Reggioli-Wilkes and Susan Fenton)