In advance of the event, Delano spoke with Henri Vuong, head of real estate debt investment research at PGIM Real Estate. She speaks during the real asset debt trends session, at 10:10am.
Aaron Grunwald: What do you want the audience to get most from the real asset debt trends session?
Henri Vuong: Structural changes in the banking system has led to a reduced bank appetite for commercial real estate debt. This has driven growth in real estate debt as an asset class and is attracting capital flows from various investor types, not only real estate but also from alternative credit as well as fixed income investors. The initial opportunity in Europe was in the high yield, high returning mezzanine space where banks pulled back and created a debt funding gap post-GFC. Real estate debt strategies are now broadening out to encapsulate the entire risk return spectrum.
From your point of view, are distressed strategies still a good approach to take in Europe right now?
We have seen very little distress this time around, compared to the GFC. Part of the reason for that is that the market was far more disciplined going into the pandemic and we did not see the high levels of leverage that were observed pre-GFC. As such, distress has been limited. Where there has been distress, these are in pockets where structural trends were accelerated by the pandemic., e.g., the rapid shift to online impacting the retail sector or where there have been stressed financial systems, e.g., Italy and Portugal--which are still working through legacy distressed debt from the GFC.
What debt strategies do you expect to see grow significantly in 2022?
Real estate debt as an asset class is maturing, and thus, strategies are broadening out across the risk and return spectrum. Post-GFC most debt strategies were focused on taking advantage of the debt funding gap, thus the focus was on high yield debt / high returning junior / mezz / subordinated debt. With Basel III finalisation and the phasing in of minimum output floors underway, this will increase the minimum required capital for banks using internal models, thus making it more costly for banks to operate at the lower risk end of the spectrum. This will create an opening for non-bank lenders to compete in the senior space.
Post-GFC real estate debt was very much a real estate orientated strategy as complementary income-based strategy to real estate, but there has also been growing investor appetite from fixed income investors seeking income-producing investments that share similar characteristics to fixed income--real estate debt mirrors these products--and hence the appetite for a broad range of debt strategies. Real estate debt is seeing a broadening of its investor base looking for yield / income, generally looking for stable, low volatility returns. This has broadened the investment universe towards senior debt with investors wanting a premium return but with low volatility, thus a widening into traditional senior debt markets.
Aside from your own talk at the Alfi event, which session are you most looking forward to hearing, and why?
I’m looking forward to the session on LGX green exchange [editor’s note: Tuesday 30 November at 4:55pm]. An increased focus on ESG has challenged industries to find a way to better measure, monitor and assess investments against ESG criteria--I’m looking forward to hearing how this exchange can facilitate this transition and support industries-wide in achieving these goals.