Article

Why complement direct lending with real estate debt?

27 September 2024
Invesco
Why complement direct lending with real estate debt?

Private credit, encompassing both real estate debt and direct lending, is currently experiencing significant tailwinds, making it an attractive option for investors. These assets offer structural benefits by providing possible opportunities to diversify income exposure away from traditional asset classes, all while potentially maintaining historically low levels of volatility. Additionally, corporate and asset-backed private credit can complement a portfolio aimed at optimising risk, return, and yield, which may help enhancing overall portfolio performance. Here are some to consider.

Current Market Environment:

  • Elevated interest rates and inflation have created attractive yields for private credit1.
  • Regulatory changes have reduced traditional bank lending, increasing potential opportunities for non-traditional lenders2.

Structural Benefits:

  • Private credit may provide high returns, low correlations, and low volatility rates3.
  • The illiquidity premium can offer 300-400 basis points over public assets4.

Market Size and Growth:

  • The commercial real estate debt market is significant and growing, with a large opportunity set for alternative lenders5.
  • CRE debt fund AUM has grown 380% over the past 15 years6.

Portfolio Optimisation:

  • Adding private credit to traditional portfolios can improve returns and reduce risk3.
  • Private credit has consistently outperformed public counterparts due to unique opportunities and diligent underwriting4.

There is a distinct potential of private credit to enhance income portfolios through diversification, high returns, and structural advantages in today’s market. Read the complete analysis.

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Footnotes

  • 1 Sources: Invesco Real Estate as of Dec. 31, 2023, using yield to worst data (unless otherwise specified) from the RE Credit - Gilberto-Levy 2 Commercial Mortgage Index (yield to maturity),  Direct Lending– Cliffwater Senior Direct Lending Index (yield to maturity, as of Mar. 31, 2024), Investment Grade Bonds – Bloomberg US Aggregate Bond Index, High Yield – Bloomberg US  Corporate High Yield Index, Senior Loans – S&P/LSTA Leverage Total Return, Treasuries – Bloomberg US Treasury Total Return Unhedged Index, Corporate Bonds – Bloomberg US Corporate Total Return Value Unhedged USD Index, CMBS – Bloomberg CMBS IG Total Return Index Value. Past performance is not indicative of future results. Diversification does not guarantee a profit or eliminate the risk of loss.

    2 Source: Mortgage Bankers Association (MBA) as of 4Q 2023

    3 Sources: Invesco Solutions, Vision, as of Dec. 31, 2023. Expected returns are geometric and are calculated using Invesco Solutions 10-year CMAs, please see proxy information on slide 16 of the PDF. Expected risk is calculated using the Barra risk model. There is no guarantee that stated objectives and targets will be met. The portfolios (* represents a 60 global equity / 40 global agg mix and ** represents a 50 global equity / 30 global agg / 10 first lien direct lending / 10 private real estate debt as referenced by “CRE debt” mix) shown are for illustrative purposes only and do not constitute investment advice or investment recommendations.

    4 Sources: Investment growth of 100; Private credit, also referred to as direct lending, is represented by the Pitchbook Private Debt Index and broadly syndicated loans are represented by the Credit Suisse Leveraged Loan Index quarterly from Dec. 2010 to Dec. 2023; CMBS (BBB) represented by Bloomberg Non-Agency Investment Grade CMBS: Bbb Total Return Unhedged Index and private real estate debt (HY) represented by the Giliberto-Levy High Yield Commercial Real Estate Debt Index (G-L 2), monthly from Dec. 2010 to Dec. 2023. Private credit is net of normative fees, while loans are gross of fees. Past performance does not guarantee future results.

    5 Sources: Invesco, SIMFA 2024, Mortgage Bankers Association as of 4Q23, National Center for the Middle Market, as of Dec. 31, 2023.

    6 Source: SIFMA “2024 Capital Markets Outlook” with data as of Oct. 2023 for treasuries, corporate, municipal, US mortgage-backed securities (MBS) outstanding. St. Louis Fed and TREPP as of Dec. 2023 for CRE loans outstanding. Pitchbook for AUM and projections, as of June 2024.

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.

    Alternative strategies may include investments in private equity, private credit, private real estate and infrastructure, which may involve additional risks such as lack of liquidity and concentrated ownership. These types of investments may result in greater fluctuation in the value of a portfolio. Private Market investments are exposed to risk, which is the risk that a counterpart is unable to deal with its obligations. Changes in interest rates, rental yields and general economic conditions may result in fluctuations in the value of any underlying strategies. These types of strategies may carry a significant risk of capital loss and other market risks.

Important information

  • This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

    Views and opinions are based on current market conditions and are subject to change.

    Unless otherwise stated, all information is sourced from Invesco Solutions in USD and as at 31 July 2024.

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