With traditional bank financing for real estate remaining difficult to attain, many fund managers have spotted an opportunity in the market; as a result there is an increasing number of real estate debt funds being launched to help fill this gap in financing. Many firms are diversifying their businesses to include specialist debt platforms, while a growing number of fund managers are incorporating debt investments into their existing investment strategies. Institutional investors are also increasingly seeing the value that real estate debt can bring to their existing real estate portfolios, with a growing number expecting to commit to real estate debt offerings in the coming year.
The number of new debt funds coming to market demonstrates the increased importance of debt within the market as a whole. The first three quarters of 2012 saw 14 debt funds begin fundraising, with an aggregate target of $11.4bn, with a particular increase in Q3. The $7.6bn targeted by debt funds launched in Q3 2012 alone is almost double the aggregate target of all debt funds launched in 2011. Debt funds accounted for 59% of $13.5bn targeted by private real estate funds which began fundraising in Q3 2012. Already in Q4 2012, there have been more debt funds coming to market. ICG-Longbow has commenced fundraising for its ICG-Longbow UK Real Estate Debt Investments III, which has a target of £500mn, and Balmain Investment Management is seeking AUD 500mn for its Australia-focused Secured Private Debt Fund.
There were also a number of notable debt funds launched during Q3 2012. Blackstone Group began fundraising for Blackstone Real Estate Debt Strategies II, which is targeting $4bn in capital commitments and focuses primarily on high yield lending on commercial real estate, and AXA Real Estate is targeting €1bn for its second European senior loan fund CRE2. M&G Investments launched two debt funds in Q3 2012: M&G Real Estate Debt Fund II focuses on mezzanine debt and M&G Real Estate Debt Fund III targets senior loans.
There are currently a total of 41 solely debt-focused real estate funds in market, with an aggregate target of $20.5bn. Solely debt-focused funds account for 13% of capital targeted by real estate funds on the road.