Funding gap creates opportunities in private real estate debt: ASK 2023

Global real estate investors will see the funding gap continue for a while, which creates opportunities for private debt in the sector. The office segment will suffer for a significant period, but logistics and multifamily will show strong performances with increasing demand, investment experts said on Thursday at ASK 2023, the biannual forum on global alternative investments hosted by The Korea Economic Daily, held at Conrad Seoul.

The outlook on global real estate was discussed by experts from South Korea’s Public Officials Benefit Association (POBA), Prologis Inc., Crow Holdings and Savills Investment Management LLP on May 18. The session was moderated by Grace Ki Seon Kim, executive director of private capital advisory at Sera Global.

PUBLIC REITS, DEBTS ARE PROMISING: POBA

Harry Song, overseas real estate head at POBA, selected two phrases for the global market outlook this year – price discovery and funding gap.

“Although real estate asset prices are falling across sectors, sellers seek to divest their assets at the prices before adjustment, while buyers want to purchase at low prices. So, price differences occur and the transaction volume is very small today,” said Song.

The funding gap is also increasing due to rate hikes and tightened standards for bank loans, he said. This will cause many loans maturing this year to default, and debtors will see profitability sharply deteriorate after refinancing with mezzanine or junior loans, which require high interest rates, Song added.

Despite the challenges, fundamentals are strong in the overall real estate market except for the office segment, he said. Unlike other investors, POBA eyes instruments in the public market such as real estate investment trusts (REITs) and debts as their prices quickly reflect market value.

Private debt to bridge the funding gap will come as the pension fund's next option, and it will return to private equity when asset prices reflect valuations, Song said.

POBA is managing 22 trillion won ($16.6 billion) in assets. The proportion of real estate and infrastructure is about 50%, which is normally higher than other Korean retirement funds. It is investing in various overseas real estate including single family, affordable housing, life science and offices.

E-COMMERCE WILL DRIVE STRONG LOGISTICS: PROLOGIS

Prologis, a San Francisco-based real estate investor, expects the global logistics segment to show robust performance driven by strong growth of e-commerce.

“It is a good year for an entry point for logistics investments. With increased cap rates, the asset values seem to have bottomed out in Europe and the US. China is experiencing a pivotal moment in the real estate cycle where demand remains strong, rent growth is steady and occupancy rates remain high,” said Martina Malone, managing director and global head of capital raising.

The macroeconomic picture continues to be a concern, she noted.

“We anticipate it could weigh on customer sentiment over the balance of the year, translating to some demand that could be delayed into 2024. But this will overlap with a slowdown of new deliveries, creating a sustained dynamic for high occupancy and rent growth into next year,” she said.

Prologis is one of the largest global industrial real estate firms, managing $208 billion in assets including around 5,500 buildings worldwide. The company is listed on the New York Stock Exchange.

US MULTIFAMILY ENJOYS HUGE DEMAND: CROW HOLDINGS

Crow Holdings, a Dallas-based real estate investment firm, has seen debt capital markets pull back significantly. Investors have entered a deep recession in markets, the firm’s Chief Investment Officer Michael Hyun said.

“Except for the office segment, assets have repriced roughly 100-200 basis points from peak levels depending on the sector, but transaction volumes remain very low and price discovery is challenging. Banks' current scrutiny will cause credit conditions to tighten further,” he said.

The multifamily and industrial sectors in the US remain strong with surging demand, the CIO said.

“National vacancies of industrial real estate remain near all-time lows and well below the average over the last decade. Supply is still elevated but at its lowest level in a year with new construction falling rapidly. Multifamily continues to benefit from a significant shortfall in residential housing and elevated cost of ownership due to higher mortgage rates. Supply is elevated and will remain a headwind through 2024,” he said.

Increased rates will likely cause unforeseen disruption and the market dislocations will eventually create opportunities, he added.

Crow Holdings is managing $30 billion in assets primarily across two businesses, real estate private equity and property development. Its main vehicle is a diversified value-add fund that started 25 years ago. The firm is also one of the largest developers of industrial and multifamily properties in the US.

PRIMARY MORTGAGE WILL OFFER RETURNS, PROTECTION: SAVILLS 

Savills, a London-based investment firm, sees significant funding gaps across Europe, Asia and the US with elevated rates and reducing traditional lenders' real estate debt financing, said Steve Willingham, head of Asia at DRC Savills Investment Management.

The challenge in the short-to-medium term will continue to be capital cost and allocation rather than credit loss, with banks reducing exposure to real estate debts, he said.

The pressure, together with an inability or willingness of investors to sell real estate in the market, will further expand funding gaps, creating great opportunities for alternative lenders, the Asia head noted.

“ "It is good timing now to invest in first-lien mortgages, which offer high returns for risks, a significant equity cushion and downside protection. The sharp and mid-term contraction in traditional lending provides the best opportunities for private credit in real estate that I have seen in my 35-year career in the industry,” he said.

Savills is managing $26 billion in assets. Korea's Samsung Life Insurance Co. bought a 25% stake in the London-based firm for £63.75 million ($79.1 million) in 2021, and parent Savills plc holds the remaining 75%. DRC Savills Investment Management, a dedicated real estate price debt management arm, has cumulative investment volumes of over $5.5 billion. 

Write to Jihyun Kim at snowy@hankyung.com

Jennifer Nicholson-Breen edited this article.