While some real estate investors are waiting for clearer signals about when it would be prudent to jump back into the market during these times of uncertainty, others are paying close attention to potentially attractive opportunities further up the capital stack. Real estate debt has attracted investor interest recently due to a high interest rate environment and the perception that it can provide more stable returns during times of declining values.
Overall Strategy Performance
The notion of more stable returns is borne out by the first-year results of the newly launched MSCI Europe Quarterly Private Real Estate Debt Fund Index, which reported a return of 3.7% in the 12-month period to December 2023. Performance was primarily driven by senior lending funds, which returned 5.8% and accounted for 53% of the net asset value (NAV) of the funds the index tracks. Whole loan funds also performed well with a return of 7.4% and accounted for 28% of the NAV they track.
In contrast, subordinated/mezzanine loan funds, which account for 16% of NAV, declined, posting a return of -8.6% in 2023. This was slightly better than the MSCI Pan European Quarterly Real Estate Fund Index (PEPFI), which posted a total return of -9.3% over the same period. Subordinated/mezzanine loan funds have shown a similar performance profile to equity funds over the history of the bond index. However, these loan funds were more severely affected than PEPFI funds during the COVID-19 crisis (due to short-term revenue disruptions) but were slower to sink into negative territory during the current market correction.