The case for private debt

Opportunities in real estate debt

By Andrea Vanni – Head of European Real Estate Debt, Alternatives

Real estate developers and owners have long used a mix of debt and equity to finance their activities. With economic growth accelerating and political risks in the region largely reduced, investor confidence in the European real estate market – and in the Netherlands in particular – is especially high.

Europe’s investment landscape was beset with hurdles at the start of 2017, but most have now been safely negotiated. This upturn is reflected in our houseview on European real estate, with another year of strong performance expected in 2018.

Our view on the Dutch real estate market is particularly positive. Encouraged by solid fundamentals and strong investment flows, we favour an overweight position for the year ahead. But what makes the Netherlands an especially attractive proposition for investors in real estate debt?

Firstly, margins are superior to those found in the likes of Germany and France. Secondly, loan-to value ratios have converged to 55%-60% since the European sovereign debt crisis, and we do not foresee any substantial increase in leverage over the short term.

The combination of these two aspects should give rise to solid opportunities in the mezzanine and senior debt space. In addition, at 230 basis points, the Netherlands’ spread of cost of debt versus prime yield (per CBRE prime office yields) is significantly higher than those of other Western European markets, which should provide greater protection against rising interest rates in the event of refinancing during the later stages of the investment cycle.

At Deutsche Asset Management we focus our real estate loan investments on assets that have shown comparatively low volatility in the past. These include residential, High Street retail and logistic assets. Given the lack of supply and the limited volatility in both rents and yields, we are also increasingly interested in student housing. By contrast, in the current climate we remain cautious with regard to secondary and tertiary office space.

Investors in real estate debt can typically enjoy a transparent and mature market with a low country risk and a supportive legislative framework. In tandem with moderate volatility, this should give them the confidence to invest not just in traditional five-year loans but in longer-dated strategies – so generating the premiums necessary to match their long-term duration requirements.


More information?

Go to our website to read our CIO View article 'Rising diversification benefits' and dowload below the 2017 Autumn Global Real Estate Strategic Outlook.