Asset allocators lean into real estate debt, shrug off bank shockwaves

Higher interest rates and a banking crisis have done little to dent the real estate debt sector. Advisers say watch this space.
Asset allocators lean into real estate debt, shrug off bank shockwaves

Despite continued monetary tightening in the US - and a banking crisis that has seen SVB collapse in the US and Credit Suisse acquired by UBS - advisers in Asia say demand for real estate debt remains resilient.

Jyrki Rauhio, regional head of credit advisory, Asia Pacific, at HSBC Global Private Banking said he was seeing growing requests for real estate financings in both the residential real estate and commercial real estate sectors.

“Activity has picked up in all major markets, especially in Singapore,” he said, adding that demand had increased beyond Asia, too.

Paul Brindley, head of debt advisory, Asia Pacific at JLL, said that interest in real estate debt in Asia was not limited to a single investor type.

“We’re seeing all types - private equity funds, insurance companies, global pension funds and family offices – becoming more active in this market,” he said.


“With borders reopened, mainland China and Hong Kong clients have now started to travel again, triggering more interest in international real estate financings, as they can now see the properties in person,” HSBC Private Banking's Rauhio noted, adding that the bank was putting up term sheets (nonbinding expressions of interest) in London, US and Australia.

The interest comes despite fears that financing would be cut from property markets following interest rate rises in the US and high-profile bank problems there and in Switzerland.

“The shockwaves felt in the financial markets from the recent Silicon Valley Bank, Signature Bank and Credit Suisse woes may lead to further tightening of credit in the commercial real estate markets in the UK and Europe, as bank lenders prioritise shoring up their balance sheets ahead of origination efforts,” said Craig Wilson, a partner in the debt advisory team at global property consultancy Knight Frank.

Some 80% of loans backing US commercial property come from America’s regional banks, according to Goldman Sachs, and about $5.6tn worth of loans are extended to the US sector.

Cuts in lending by banks hoarding deposits out of fear of another bank run would be bad news for a sector already buffeted by higher interest rates and the fallout from the pandemic.

On March 24, Richard Ramsden, leader of the financial group in Goldman Sachs’ global investment research team published a research note warning of the fallout for the sector as US regional banks seek to shore up their lending positions.

“I do think you will see banks pull back on commercial real estate commitments more rapidly in a world [where] they’re more focused on liquidity,” it said.

Recent figures from financial data provider Refinitiv suggest the sector in APAC has been affected, too. M&A activity totalled $10.3 billion between January and late March, down from $18.9 billion over the same period in 2022.


In March, Hong Kong-based family office investor, Timothy Tsui, told AsianInvestor that prices did not adequately reflect the impact of the pandemic. “The glut of empty commercial real estate and offices is a big risk that people are sweeping under the rug, for now," Tsui said. 

But investors appear happy with the risks -- for now

Interest so far this year follows a strong year for APAC-focused real estate debt funds in 2022, when $3.19bn was raised, up from $2.09bn in 2021, according to Preqin. Money raised for those focused outside APAC fell from $36.75bn to $25.75bn.

JLL's Brindley said debt investing provided an effective way to mitigate many of the headwinds stifling equity investing in the sector.

“By the middle of the second quarter last year, we started to see a ramping up of interest in the debt sector,” he explained. 

"It was not necessarily one inflection point, rather an accumulation of factors such as rising central bank rates, spread widening in the US and EMEA, recessionary fears, bid-ask gap for sales and acquisitions, as well as other factors,” he added.


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