Recent years have seen debt funds feature more prominently in the private real estate industry, with many firms diversifying their businesses to include specialist debt platforms and a growing number of fund managers incorporating the acquisition or origination of real estate debt into their existing investment strategies. As the availability of bank financing has fallen in the US and Europe, many fund managers, alongside other non-traditional lenders, are increasingly stepping in to help fill the funding gap.
Institutional investors are also increasingly interested in the value that real estate debt can add to their existing real estate portfolios. A growing number of institutions believe that these funds can generate returns with a lower level of risk than equity investments in real estate, and a significant number of investors plan to commit to funds with a debt strategy in 2013. Thirty-four percent of real estate investors interviewed by Preqin in December 2012 are targeting debt funds in the following 12 months, compared to just 8% in the 12 months following December 2011.
The 2013 Preqin Global Real Estate Report shows that the most successful year in terms of fundraising for solely debt-focused funds was 2008, with 33 solely debt-focused funds raising an aggregate $13.8bn. Fundraising has been slower since 2008, and while 2011 was a relatively successful year, with 19 solely debt-focused funds raising an aggregate $7.8bn, 2012 saw only eight solely debt-focused funds close on an aggregate $2.9bn.
While the percentage of capital raised by solely debt-focused funds has fluctuated in recent years, demand for debt exposure has consistently increased. The proportion of capital raised by funds solely making equity investments has decreased considerably, with a growing proportion of funds incorporating debt investments to some extent. In 2007, solely equity-focused funds accounted for 90% of the aggregate capital raised by all real estate funds globally, with 7% raised by funds targeting a combination of debt and equity investments and the remainder by those solely investing in debt. Since 2007, there has been a large decrease in the proportion of capital raised by solely equity-focused funds, down to 52% of the aggregate capital raised by all real estate funds in 2012. The proportion of capital raised by solely or partially debt-focused funds has increased significantly from 11% of aggregate capital raised in 2007 to 48% of aggregate capital raised in 2012.
The largest solely debt-focused vehicle to close in 2011-2012 was Blackstone Real Estate Special Situations Fund II, which held a final close in February 2011 on $2.9bn. The second largest solely debt-focused fund to close in the period was Fortress Japan Opportunity Fund II. The fund closed on ¥130bn (approximately $1.6bn) in December 2012, above its target of ¥100bn (approximately $1.2bn), and targets real estate-related debt investments in Japan. CRE Senior 1, managed by AXA Real Estate, was the third largest fund to close in 2011-2012. The senior-debt fund, which is targeting Western Europe, including France, Germany and the Netherlands, raised €1bn.
The 10 largest debt funds on the road are primarily targeting Europe or North America. Blackstone Group launched Blackstone Real Estate Debt Strategies II, the largest debt fund in market, in August 2012. The fund has a $3bn target and will focus primarily on high yield lending on commercial real estate in North America and Europe. The second largest fund currently on the road is CRE2, the follow-on fund to CRE Senior 1, which closed in December 2011. M&G Investments launched two parallel debt-focused funds in Q3 2012; M&G Real Estate Debt Fund II and M&G Real Estate Debt Fund III. Both funds are targeting commitments of £500mn and will invest throughout Western Europe. M&G Real Estate Debt Fund II focuses on mezzanine debt, while M&G Real Estate Debt Fund III targets senior loans.