Displaying items by tag: private credit

The Federal Reserve’s tightening campaign surprisingly has had a muted impact on the broader economy as evidenced by continued expansion despite the highest rate in decades. In terms of the stated goal of curbing inflation, results are mixed as well. 

However, the vector which immediately responded to tighter policy is real estate given that affordability has declined due to higher rates. In some markets, activity has simply cooled, while in those with poor fundamentals, prices are falling more precipitously. 

Within real estate, commercial real estate (CRE) is the most challenged given oversupply and the recent rise of remote work. For Barron’s, Rob Csneryik covers why some contrarian investors are seeing opportunity in the beaten-down sector.

In essence, it’s a buyer’s market with so many traditional sources of funding out of the picture, leading to more favorable terms and higher returns. Further, there is less risk with values already down so much. Many believe that office occupancy rates will start to gradually rise especially if the economy does weaken which would give employers more leverage to force employees back to the office. CRE would also likely benefit from a mild recession as it would compel the Fed to cut rates which would turn a major headwind into a tailwind. 

Finsum: Commercial real estate is the weakest segment of the real estate market. However, some contrarians see opportunities amid the carnage.

Ever since the Fed embarked on its tightening campaign starting in the early months of 2022, the real estate market experienced the most immediate impact due to rising mortgage rates negatively affecting home affordability.

Initially, publicly traded real estate stocks saw deep drawdowns while private real estate performed much better. Now, this gap is beginning to shrink as private real estate has been following public real estate lower. One factor is that it’s increasingly becoming clear that high rates are not going to disappear anytime soon due to the resilience of the economy and inflation. In fact, inflationary pressures seem to be reigniting given the recent strength in oil and auto workers striking.

In terms of when private real estate will bottom, some indicators to watch are an increase in transaction volume even at lower prices, a change in monetary policy, and increase in lending standards. Currently, all 3 are working against private real estate given that many markets are ‘frozen’ as sellers are unwilling to cut prices, while buyers don’t see many attractive deals at current yields. The Fed’s focus remains on stamping out inflation whether through further hikes or keeping rates ‘higher for longer’. Finally, lending standards are unlikely to loosen especially with so many banks struggling with balance sheet issues and/or an inverted yield curve. 

Finsum: Private real estate was immune to the weakness in public real estate for so long. Find out why this is starting to change.

One of the consequences of tighter monetary policy is to curtail housing demand by squeezing affordability. As a result, all sorts of housing activity has cooled such as mortgage applications, new home construction, renovations, and house flipping. While there are all sorts of losers, it’s presenting an opportunity for many private real estate funds who are finding a buyer’s market.

 These funds raise money with multi year holding periods so are less affected by the change in the funding environment at least in the short and intermediate-term. Another factor in the real estate market is that many regional banks are pulling back from extending credit given their balance sheet concerns. Overall, it’s a risk for the broader economic outlook but a unique opportunity for private real estate investors.   

And, more money is being allocated to real estate - public and private. In the first-half of the year, 43% of institutions surveyed, increased their allocation to real estate by an average of 76 basis points. Sovereign wealth funds also increased real estate exposure from 6.9% to 7.9%. In terms of geography, private real estate continues to be dominated by North American investors.

Two of the most common ways to invest in real estate are through REITs or private real estate. While both have similarities, there are some key differences in terms of structure, liquidity, access, risk, and return. 

REITs are similar to mutual funds in how they are traded and valued. However, they must derive 75% of their income from real estate investments and distribute 90% of taxable income to shareholders. There are a variety of REITs that encompass the whole industry such as retail, commercial real estate, senior housing, multifamily, office, etc. 

Unlike private real estate, there is no end date, and they can operate in perpetuity. Private real estate differs from REITs in that they tend to be pooled investment vehicles that give investors fractional ownership. 

While REITs must abide by strict tax laws, there is no similar requirement for private real estate. Another difference is that private real estate tends to not offer income. Instead, their goal is to pool capital to acquire and develop a property, hold it for seven to ten years, sell it at a profit, and return proceeds to investors with the operators taking a cut. 

Finsum: There are many ways to invest in real estate. Two of the most common are REITs and private real estate. Here are some key differences between both options. 

Jonathan Brasse discussed a recent white paper from Swiss alternatives group, Partners Group, about why private markets are poised to grow faster than public ones over the next decade in an article for PEREnews.

In essence, Partners Group notes the changing landscape for private markets, and how they are playing a larger role in financing the ‘real economy’. Since 2016, funding on private markets has exceeded that of public markets. Last year, about $400 billion was raised on public markets, while more than $1 trillion was raised in private markets.

Another change is that companies raising on private markets are generally healthier and more profitable than ones listing on public exchanges. These trends are also evident in the real estate market.

Fundraising for real estate in private markets has been steadily growing, while the number of real estate IPOs has dwindled. In terms of future returns, real estate listed on private markets has a better chance to be renewed, repurposed, and transformed, while such expenditures are less common on the public side given the pressures of quarterly earnings and shorter time horizons of public investors. 

Finsum: Private markets have been overtaking public markets in terms of funding. This trend is also happening in real estate markets.