European real estate debt: everything you need to know in 5 minutes
Transcript
Hi, I’m Andrew Gordon, Managing Director at Invesco Real Estate.
Why European Real Estate Debt?
Many investors are familiar with the appeal of holding real estate. With a generally low correlation to other asset classes, it has the potential to serve as an instant diversifier in a mixed asset portfolio, even more so during times of heightened inflation and rising interest rates.
While real estate debt is of course underpinned by real estate assets, it can provide a number of additional features:
· At an average loan-to-value ratio of 70%, it can potentially provide downside protection against falls in value of the underlying collateral of up to 30%.*
· It can provide predictable income, with the fixed quarterly distributions characteristic of a fixed income instrument but at a premium to equivalently rated traditional fixed income products.
· It is a strong diversifier, with capital allocated across a diverse pool of loans, potentially reducing volatility and producing returns that typically have a low correlation with direct real estate investments.
Property first
We take a ‘property first’ approach to originating and underwriting loans.
Working with our teams across Europe, leveraging our experience as a direct property investor, we focus first and foremost on the quality of the underlying asset, the viability of the business plan, and the expertise of the borrower.
Once we are satisfied that these all meet our strict selection criteria, we will then look to structure a loan which represents the best balance of risk and return for each project.
Combining this local knowledge through our eight European offices, our global expertise in real estate debt makes us ideally placed to create a portfolio which is diversified by geography, asset type and loan type.
As part of our loan underwriting and selection process, we also place a strong emphasis on the ESG characteristics of the underlying assets, prioritising lending on sustainable assets, and ensuring that each borrower and each asset meets environmental, sustainability and governance targets.
Why now?
Real estate debt has the potential to act as a ‘triple hedge’ against inflation:
1. Loans are typically floating rate, and therefore, to the extent that underlying interest rates move in line with inflation expectations, returns will grow with inflation.
2. The loans are secured against real estate, which typically outperforms in an inflationary environment.
3. The typical weighted average life of the loans is around four years, ensuring that the income and rent from the underlying collateral is re-based to market on a regular basis.
With the current volatility of the wider investment markets, real estate debt is a highly compelling proposition which can potentially provide inflation-protected income secured against a geographically diversified pool of assets, with potentially significant risk mitigation.
What’s next?
Real estate markets have experienced some considerable disruption over the last two years and European economies are now facing the twin concerns of growing inflation and rising interest rates, with threats to economic growth looming on the horizon.
However, we still expect healthy occupier and investor demand for high-quality, well-located real estate across Europe, as well as strong demand for assets that meet higher ESG investment criteria.
In light of this, local detailed knowledge of the underlying assets becomes ever more important for real estate lending.
We believe that investors appreciate that, especially in times of uncertainty, European real estate debt has the potential to offer stable distributions, significant risk mitigation and inflation-hedged returns.
If you have any queries about these or any other issues, then please get in touch.
In the meantime, thank you for watching, and goodbye.
*Source: Invesco Real Estate as of 31 March 2022. High level indicative terms only. There is no guarantee that any transactions will be concluded on these terms or that investment team target returns will be achieved.
Andrew Gordon shares his insights on European real estate debt.
Discover how it could serve as a diversifier in your portfolio – helping in periods of heightened inflation and rising interest rates.
FAQs
Before buying a house, most of us set up a mortgage to help pay for it. Similarly, when a firm buys a property for commercial purposes, they typically finance the purchase with a loan. That’s what we’re talking about in the context of real estate debt.
Real estate debt is similar to fixed income insofar as it pays fixed distributions. However, it can generate greater levels of income than traditional bonds with equivalent ratings.
Real estate debt can offer a ‘triple inflation hedge’:
- It is secured on real estate – and, historically, real estate has outperformed in periods of inflation.
- Invesco’s loans are typically floating rate loans. In other words, we charge a margin over an appropriate reference rate, such as SONIA or EURIBOR. As this rate goes up in reaction to increased inflation expectations, so does the amount of interest we receive.
- The loans we make are typically four-year loans. This means the income and rent from the underlying collateral is rebased to market on a regular basis. This allows us to reposition our portfolios, reflecting any new inflation that has been passed through the system.
When originating and underwriting loans, we focus first and foremost on the quality of the underlying asset, the viability of the business plan, the expertise of the borrower, and ESG investment criteria.
More in the series
Investment risks
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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.
Property and land can be difficult to sell, so investors may not be able to sell such investments when they want to. The value of property is generally a matter of an independent valuer’s opinion and may not be realised.
Important information
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This document is marketing material and is not intended as a recommendation to invest in 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. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.
