If you research a little bit, you will see that all over the world debt funds play a very significant role in the arena of real estate finance of today. Traditionally speaking, when you compare the real estate lending market of Europe, you will see that it had always maintained a very low profile as compared to that of the US real estate funding market.
Understanding The Role Played By Debt Funds In Real Estate
This change is the effect of the global financial crisis following which there was a significant down surge created in the commercial real estate markets. This is due to several reasons, such as:
- The credit drought created by the banks by reducing their lending dramatically
- The seemingly hard to fill the gap in the real estate lending market now being filled by the new lenders who got an opportunity to enter into the scene and most obviously
- The non-listed real estate debt funds.
It is due to the proliferation of the new lenders since then in the real estate market that has increased both the size and number of real estate debt funds. This however culminated into a record in 2017. According to the statistical report of INREV, it was found that:
- It is in this time when the fundraising levels reached a new and fantastic high of 10.6 billion and
- The investment, however, fell by more than 40% in the next year.
Noticing this paradigm shift in the trend in the real estate funding, the experts took this as a warning sign considering the interest in the asset class.
However, considering who is lending in the real estate market, there are a few things that are very much clear. These are:
- The traditional lenders are back into the business and are surely gaining the dominant position that they once had and most importantly
- They now do not have to worry about any pre-crisis levels of liquidity.
Both these aspects have allowed the real estate debt funds to hold a significant position, and with their role play, it has cemented the position in the real estate funding market with debt investments.
Leading to further worries
Promising for the real estate market as it may seem, these facts lead to few other worries that these available debt funds have raised in the real estate finance arena. Experts now are looking for the other factors that may influence the market in the short, medium, or long term. A lot of studies are conducted over the years in this regard, and a lot of debt settlement reviews are taken into account and analyzed by the experts to arrive at a conclusive and well-thought inference. They have come with a few facts and suggestions through their researches.
It is found that the experts that apart from the liquidity issues, the fact that the lending criteria in this specific sector is tightly controlled than in the olden times leads to more concerns. They compared the scenarios of the past with modern times and found a few notable facts such as:
- In the past, there was a specific relationship established with the borrower by the lenders that outdid any restrictions in the credit that may have been placed or required on any particular deal.
- In addition to that, the borrower community in the past found it more challenging to fiancé with the traditional lenders in the market when they found that the particular assets that do not fall neatly fall within the set parameters.
- It is for these reasons that the realm to a step forward towards the debt funds a few of which are specifically designed to explicitly establish a relationship with a target audience to fund against assets.
- It is also found that the new lenders have also found a specific interest in funding those asset classes that do not belong to the core business of other traditional lenders.
- Besides, the fact that these debt funds also lend much higher up the capital stack as compared to the traditional money lenders are willing to do has called for proper scrutiny of the regulation. This fact has also played an important role in driving more customers in the market here.
In addition to all of the above facts, the given fact that the banks focus more on the capital adequacy aspects and its requirements, it has made it more expensive for them to provide higher leverage.
Moreover, the fact that these debt funds that are easily available in the real estate market are not controlled in the same fashion has resulted in many lenders chasing whole loan strategies. This is because such strategies have a very high remunerative effect.
What does this mean? Well, breaking down a complex fact and result in simple points, it can be said that:
- It is a universally accepted fact that there is an extensive load of capital when the equity side of a real estate home is considered.
- This results in reduced leverage requirements and
- The effect of the high gearing on returns continues to raise the appetite of the lenders for higher leverage.
In this aspect, the experts say that it is high time to consider the worth of these funds and what are the upcoming challenges that the real estate market space may face due to this. This is required even if it is true that in general, these debt funds may be more flexible in terms of leverage and risk.
This is because it seems that there is a restricted appetite by the traditional lenders to venture too high up in the risk curve especially when their current business cycle, loan volume, and profit are taken into consideration.
To sum up, it can be said that the ability to set up capital is a perpetual issue across the entire market space of both debt and equity. This is due to the ever existing uncertainty and the fact that real estate debt funds are here to stay. It is therefore required by the fund managers to abstain from making promises that will be unable to keep or even worse, lose investments in case the prices of the property falls.