Is It OK to Invest in Private Real Estate Debt Funds
Private real estate debt funds are always a good investment option.
Borne out of the aftermath of the Great Recession of 2008-09, private real estate debt funds dominate the market now.
Back then, there was a void in the market. The banks were short on funds. No bank could liquidate debts, let alone lending. Hence, private lenders emerged.
Since then, the contribution of private lenders has been the norm in the financial industry.
There are multiple real estate private credits. Of those, direct lending is the most common and famous as well.
Owing to private lending, real estate is the most profound collateral accepted in the US financial industry. Consequently, private debt funds worth $5.9 trillion are exchanged in America now1.
Let’s dive into the most plausible benefits of investing in private real estate debt funds. We will also discuss the real estate debt strategies.
Some real estate debt funds are performing better than others. So, we will search and list the top real estate debt funds for our readers.
How Do Real Estate Debt Funds Work?
These funds are unregulated credits. Non-bank lenders mainly extend these credits to users. Hence, borrowers can directly accept credit from the lenders.
The total non-financial private debt in the US is $27 trillion. Out of that, private real estate debt funds make up the lion’s share. Private real estate debt funds are funds that commercial developers mainly borrow.
You may borrow private real estate debt funds for miscellaneous reasons. Mostly, multi-family residential projects need such funds. However, developers often resort to private real estate debt funds during public constructions like malls and hotels.
Real Estate Debt Strategies
I often come across a question- Is It OK to Invest in Private Real Estate Debt Funds?
My answer would be yes. Discrete loan strategies regulate the debt funds. For instance, some lenders support residential construction projects more than others. At the same time, other lenders are bent on public construction projects.
However, readers may ask, why Private Real Estate Debt Funds are needed at all. There are abundant bank schemes to fund these projects.
The Great Recession has been over for quite some time now.
That’s a good thing to ask. The whole entity of Private Real Estate Debt Funds rests on an unregulated system.
Now, you may fathom who would need loans from unregulated sources.
Firstly, people who don’t have access to traditional funds use these funds. However, some people have additional funding needs that banks cannot satisfy.
Let’s say their FICO score or trade status doesn’t allow them to lend an amount they desire. So, they must resort to Private Real Estate Debt Funds.
Best Strategies that Define the Industry
Multiple strategies can regulate real estate credit funds, as y’all know now. However, kudos to direct lending. It’s been the most popular form of real estate credit fund in the last ten years.
Direct lending
The lending bodies/individuals earn from the interest charged. The lending rates may also change throughout a loan.
At the same time, lenders charge processing fees. The other fees included in the deal are origination, exit, and foreclosure.
So, we see many more ways to earn from real estate credit funds, besides interest from borrowers.
Mezzanine loans
Mezzanine loans are also quite popular in the US now. These loans are more specific than direct lending.
However, the strategy is almost the same. Lenders invest in specific projects only. However, the selected projects are not categorized as per utility. There is, instead, only one criterion applicable.
Mezzanine loans are given to projects which have a lower-than-average market price point.
But why?
There can be many reasons for funding such projects.
Solvency could be one of the issues. There might be cash flow problems, too.
Let’s Take an Example to Understand Better
During the pandemic, the lockdown restrictions were impermeable. So, many hotels lost their value. The tourism sector has most relinquished. At that time, sourcing loans for hotel projects would have been difficult. The reliability of the industry was low. Hence, banks fathom that borrowers from the industry couldn’t afford payback.
At that time, the mezzanine loans came in handy.
But why lend projects with lower price points?
The reason is quite simple. Mezzanine debts incur greater interest rates. So lenders have a bigger chance of earning from these loans.
Distressed Loans
The market is volatile now. The interest rates are rising. That means lenders can earn big time. At the same time, property prices are going down. It implies that many ongoing projects would be less priced now. Hence, the chances of earning money from the projects will also be lower.
Such contingencies invite real-time distress.
They also create opportunities for more sophisticated lenders to step into the market. They can now make the best out of the enticing earning opportunities.
Given the ample chances of earning through real estate debt funds, we may conclude it is OK to Invest in Private Real Estate Debt Funds.
Reasons For The Rising Popularity Of Private Real Estate Debt Funds
The real estate debt funds list is becoming longer than ever every day.
However, there are some critical market factors behind this growth.
The first and foremost factor is the Maturity Wall.
In 2025, the value of most existing real estate debts in the US will mature. And most of these debts will likely be refinanced.
The new and existing lenders consider this a lucrative opportunity. Rightly so.
In the US, the amount of debt that would be refinanced might reach $1.5 trillion4.
Since the interest rates have been higher, many borrowers may be unable to repay the principal as the loan matures. Hence, the lenders have the upper hand now. They can now continue the loans against new terms. They will likely increase the interest rate and charge other contingent handling fees. The cutback from the supply side has made things worse.
Considering the volatilities, more banks are rejecting real estate project loans.
At one point, the asset owners, developers, or managers have no other option but to use private real estate debt funds.
Pros and Cons of Private Real Estate Debt Funds
Like everything else, private real estate debt funds also have pros and cons.
Pros
- These loans are collateralized. The property asset is the most significant collateral that borrowers can offer. As a result, the fund may recoup any contingent losses.
- Short loan tenures are another benefit that lenders enjoy. Private real estate debt funds are commonly lent for six months to 1 year.
- Given the opportunities, private real estate debt funds are now a stable source of non-banking income. Hence, more lenders are stepping into the sector.
- The return rates are fixed. Hence, lenders can earn calculated benefits from private real estate debt funds.
Cons
- As the interest rates are fixed, the earning potential becomes limited.
- At the same time, inflation impacts a large part of earnings. The net return on the amount invested can be lower due to inflation.
- Many borrowers foreclose private real estate debts. As a result, the lenders cannot earn as much.
Top Real Estate Debt Funds
Knowing of them, let’s invest in seeking the best real estate debt funds.
New Silver
New Silver funds real estate projects in many ways. Developers and asset owners may get rental loans, ground-up construction loans, and fix and flip project loans from them.
New Silver investors may earn an average of 14% over their investment annually. That’s why New Silver is at the top of our charts.
There are other benefits of such a diverse lending portfolio. Firstly, New Silver mainly generates high-income returns. Secondly, investors get quarterly returns due to the steady flow of projects.
Blackstone
The net investment portfolio of Blackstone is worth $586 billion. However, there are obvious reasons why the brand is so successful. They fund senior and mezzanine debts only.
Besides, Blackstone has a global portfolio of projects. They are also reputed for investing in prominent real estate projects only.
Berkshire
This is a dedicated fund for residential investments. However, they offer senior bridge loans, mezzanine debts, and other loans. Moreover, they fund a versatile range of residential projects, too.
Final Words
The bottom line is that Private real estate debt funds are worth investing in. On one hand, the income from the funds is high-yielding. On the other hand, the fund market is highly regularized. However, it is one of the US’s central non-financial regulated debt funds.
Most private real estate debt funds have a secure and diverse portfolio. Hence, there’s no dearth of investors. My research shows that new investors are joining the real estate debt market every day. At the same time, asset owners are becoming more vulnerable. So, the commercial real estate debt market will continue growing.
Read Also:
Post Your Comment