Real Asset Insight #6 June 2020

Insight & Strategy – European Debt Finance & Investment
Debt investment offers ‘protection
in lower valuation environment’
Investors on hunt for yield see asset class as a good option
Source: AdobeStock/Looker_Studio
‘I think that
debt provides
investors with
what they need
at this point
in time.’
Anthony Shayle,
consultant
Now could be a good time to invest in
debt, experts have told Real Asset Insight.
‘I think debt provides investors with what
they need at this point in time,’ says Anthony
Shayle, an independent consultant. ‘The
debt investment environment represents an
opportunity for investors to select risk/return
characteristics that provide a premium to the
fixed income model and a volatility dampener
against the real estate model.’
A snap poll of market players and subscribers
at Real Asset Media’s online briefing in May
revealed that 71% believe it is a good time
to invest in real estate debt, with only 29%
disagreeing. When asked to rank on a riskadjusted
basis, 63% of delegates stated they
prefer debt to real estate equity.
‘The poll is right, because investors are on the
hunt for yield,’ adds Shayle.
Debt also offers some protection. ‘There is
strong interest cover due to low interest rates
and lower leverage overall so it’s a better place
to withstand the current situation than it was in
the GFC,’ says Emma Huepfl, managing director,
European credit strategies, at CBRE Global
Investors.
‘If you are coming into debt now you’re coming
in off a lower valuation basis and you’ve got a
cushion to withstand further valuation shocks,’
she adds. ‘So I think that debt does offer
protective characteristics in this environment.’
However, calling debt a safe haven is a stretch,
she adds. ‘Safe haven is a misnomer for the
asset class as a whole, as debt carries a whole
range of returns from 2% to 20%+,’ Huepfl says.
‘Right now I think there is good value in core
senior. The sad fact is that money will be lost
on some well-structured and well-underwritten
deals in this cycle and no asset class is going to
be entirely immune.’
PRIMARY MARKET FOCUS
Interest in the asset class will tend to focus
on the primary market while the secondary
market suffers.
‘There is definitely liquidity in the market and
an interest in buying into loans with a focus
on the primary market, but the impact on
the secondary syndication market has been
quite intense,’ says Norbert Kellner, head of
syndication at Berlin Hyp.
It is also important to consider the implications
of negative interest rates for real estate debt
specifically, now that the Bank of England has
said it could use them as part of their policy, as
has happened in Europe.
‘There is a floor of zero that’s implicit in UK
real estate debt,’ says Jonathan Lye, director of
Auxilium Financial Risk Management. ‘Now that
floor is in doubt, the question about investing
in debt is whether it will be worth less than
you invested and there’s uncertainty over what
value will look like.’
64 Real Asset Insight | Issue 2 July 2020