‘It’s a good time to invest in debt’
Now it could be a good time to invest in debt, delegates heard at Real Asset Media’s European Debt Finance & Investment Briefing, which was held online this week.
‘I think debt provides investors with what they need at this point in time,’ said Anthony Shayle, 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’.
Delegates’ views were equally clear. A snap poll conducted by Real Asset Media revealed that 71% of respondents believe it is a good time to invest in real estate debt, with only 29% disagreeing. When asked to rank on a risk-adjusted basis, 63% of delegates stated they prefer debt to real estate equity.
‘The poll is right, because investors are on the hunt for yield,’ said 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,’ said Emma Huepfl, Managing Director, European Credit Strategies, 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 said. ‘So I think that debt does offer protective characteristics in this environment’.
However, calling debt a safe haven is a stretch. ‘Safe haven is a misnomer for the asset class as a whole, as debt carries a whole range of returns from 2% to 20% plus,’ Huepfl said. ‘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’.
Interest 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,’ said Norbert Kellner, Head of Syndication, Berlin Hyp.
Looking ahead, experts agreed that, despite the uncertainty, we are unlikely to see massive distress in the market this year.
‘Renegotiations and restructurings will be required, because too many businesses have suffered,’ said Jonathan Lye, Director, Auxilium Financial Risk Management. ‘The way ahead depends on how much permanent change there will be in the way people behave, whether they return to shops, offices, restaurants and so on. Personally, I believe there will be a positive recovery before the end of the year. Q4 will look a lot more like Q1’.
The view from Germany is particularly optimistic, as the market never ground to a halt, not even at the peak of the pandemic. ‘We’ve completed the deals we started in Q1, when there was a lot of activity, every deal has been studied and examined and no one has pulled out of any deal,’ said Carsten Loll, Partner, Real Estate, Linklaters. ‘But we also initiated and completed a deal in Hamburg during lockdown, which was extraordinary’.
Looking ahead, the sentiment is positive, he said: ‘Clearly2020 will not be a repeat of 2019, but given where we were just a few weeks ago we can see things are changing for the better. Normality will return in the second half of the year’.
That means that the issues of the past will surface again. ‘There are still immense levels of liquidity that need to be invested,’ Loll said. ‘It will come in a big wave and the lack of product will return to being the main problem’.