Some of the world's largest investors are making deeper inroads into lending to commercial property, as they snap up market share from retreating banks and bet on an end to the sharp drops in real estate prices.
U.S. fund firms PGIM, LaSalle and Nuveen, Canada's Brookfield (BN.TO), opens new tab and QuadReal, Britain's M&G (MNGL), opens new tab, Schroders (SDR.L), opens new tab and Aviva (AV.L), opens new tab, and France's AXA (AXAF.PA), opens new tab all told to media that they plan to increase their credit exposure to property.
Most are focusing on lending to logistics, data centres, multi-family rentals and the high-end office market. The office sector more broadly continues to struggle, deterring funds.
"If I look at our strongest bet currently, it's probably real estate debt," said Isabelle Scemama, who heads up AXA's 183 billion euro (USD 198 billion) alternative investments arm.
LaSalle Investment Management, which manages USD 89 billion globally, said it was targeting growing its real estate debt investments by 40 per cent to around USD 7.6 billion over two years, including in distribution, hospitality and student housing.
Betting on real estate debt is not for the faint-hearted. The global commercial property industry, in particular offices, is still in the grip of its biggest slump since the 2007-9 financial crisis.
But alternative lenders believe the worst may have passed and they can generate attractive returns as valuations recover.
"Historically through real estate cycles, you would find that generally loans made at the bottom of the cycle... tend to have the lowest delinquency rates and the highest spreads," said Jack Gay, global head of debt at Nuveen.
Stricter capital rules for banks - including new international standards dubbed the 'Basel Endgame' - and U.S. regional bank failures have opened the market further, fund firms said.
"The challenges faced by the banks have really led to a decrease in direct (loan) originations for commercial real estate," said Nailah Flake, managing partner in Brookfield's Real Estate Group, which sees opportunities to lend more.
Private equity firms are also weighing in. Apollo Global Management launched its first dedicated European real estate debt fund targeting 1 billion euros this year, a source familiar with the matter said.
The fund management arms of major banks are also targeting the market. Goldman Sachs Asset Management said on Monday it had closed its largest real estate credit fund to date, with over USD 7 billion of lending capacity, including some of the firm's own capital and leverage.
In Britain, non-bank lenders accounted for 41 per cent of real estate loans in 2023, more than doubling from 19 per cent just nine years earlier, according to Bayes Business School data, which also showed that new commercial property lending in Britain reached a decade-low.
Across continental Europe, the proportion has also steadily grown to 20 to 30 per cent, Bayes said.
The growing role of investment funds in lending - known as 'shadow banking' - is worrying regulators because of default and contagion risks. Reporting requirements for private funds are also softer than for banks, meaning less transparency.
European Central Bank Vice-President Luis de Guindos said in March that the exposure of non-banks to commercial real estate was one of the main risks to financial stability in the region.
"I do find it quite worrying that (invested) pension money is affected and funds can do whatever they want and it goes under the radar," said Bayes senior research fellow Nicole Lux.
