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The Growth of Real Estate Debt Funds – May 2014 (Part II)

by Olivia Harmsworth

  • 29 May 2014
  • RE

The number of debt funds in market has increased year-on-year since 2010, when just 26 debt-focused funds were in market targeting a total of $10bn in investor capital. This increase demonstrates that fund managers were quick to capitalize on the opportunity to invest in real estate debt resulting from the retreat of traditional market lenders. However, these funds may now face increased competition as banks increasingly return to real estate. The relatively recent emergence of debt as a strategy for private real estate funds means that a large proportion of managers raising debt funds have limited experience regarding the strategy, despite many having long track records in the private equity real estate space. Sixty-two percent of capital targeted by debt funds in market is by managers raising their first debt fund. 

Regionally, there is an increasing prominence of Europe-focused debt funds, with a considerable 57% of the capital targeted by debt funds in market focusing on investments in the region. This is a significant increase from 2012, when just 9% of capital targeted by debt funds in market focused on European investments. Correspondingly, the proportion of capital targeted by debt funds in market focusing on North America has declined from 80% in 2012 to 38% in 2014. Outside of North America and Europe, the debt fund market has yet to evolve, with Asia and other regions now accounting for just 5% of targeted debt capital. 

The current outlook for fund managers raising private real estate funds focusing on debt investments is encouraging, with fundraising for the strategy showing signs of growth and an increasing proportion of funds closed able to reach or exceed their target sizes. However, the surge in the number of debt funds in market means that competition for investor capital is at an all-time high, particularly with investor appetite showing little sign of change over the last 18 months. This is particularly the case for European funds, with many new Europe-focused offerings being launched in recent quarters. Nonetheless, there is considerable cause for optimism in the private real estate debt market, and many managers will remain confident that they are able to attract significant amounts of investor capital in the coming months.

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