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'Tempting returns' for Asian investors in European real-estate debt

Asset manager thinks Asian investors will be drawn by yields of up to 12 per cent from non-bank lenders in European real estate

PUBLISHED : Wednesday, 05 September, 2012, 12:00am
UPDATED : Friday, 07 September, 2012, 11:36am

Asset manager BlackRock believes Chinese and other Asian investors may be lured by high returns to invest in a growing market for real-estate debt in Europe.

The potential yield offered by some real-estate debt held by investment funds has risen from a historic 8 per cent on average to returns of up to 12 per cent currently, according to Joseph Pacini, the head of BlackRock's alternative-investment-strategy group in Asia Pacific.

The rise in yields has been driven by commercial real-estate developers who formerly relied mostly on banks for their debt financing. They are now turning to financiers, some of whom raise capital from investors.

With banks now reluctant to lend, property developers or buyers were forced to pay higher interest rates to other lenders, said Pacini. He cited the example of a British developer who was able to borrow 70 per cent of the funding needed to buy a £100 million (HK$1.23 billion) office property in London on a five-year-term loan from banks in 2007.

But after five years when the loan matured, if the value of the property had dropped to £70 million, and the bank was willing to refinance only 60 per cent of the property value, the shortfall in the value of the developer's security against the loan would have to be paid up or refinanced.

"In today's environment, banks won't lend that much. But owners still want to hold on to their property, so they need to pay more interest on their loans," Pacini said, adding that real-estate debts usually matured in five years and the property market was active in 2007 before the credit crunch.

Such mezzanine real-estate debt - unsecured debt, held by hedge funds for instance, that is similar to second mortgages - had become attractive to investors, Pacini said.

"There is an increased appetite for real-estate debt amongst Asian investors in Europe, and that is expected only to increase."

Hong Kong and mainland buyers have shown a strong interest in buying property in London, where Asian buyers accounted for £1.7 billion worth of transactions in central London's office-investment market last year, up 150 per cent from a year ago.

Of the £3.5 billion worth of offices that were bought and sold in London last year in lot sizes of more than £100 million, Asian buyers accounted for 40 per cent, Pacini said.

Investors in real-estate debt, as opposed to properties, were focused on current yields and the ability of borrowers to repay their debt, he explained. Real-estate debt funds might invest in a basket of properties to diversify risks.