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THINK UK: Value to be found in Commercial Real Estate Debt


According to its latest research report, TH Real Estate finds that as we edge deeper into 2016, there are two dominant questions on the minds of investors within the UK commercial real estate (CRE) market: where are we in the property cycle and which markets and sectors offer the best risk adjusted value?

The current volatility of equity and bond markets, related to geo-political uncertainties and the impending UK referendum on EU membership, has done little to quell market belief that we are now in a more muted CRE outlook. The firm finds that whilst markets may be in a completely different monetary policy stance compared to 2007, by observing where pricing and rental tone are for selective prime, core markets relative to the past peak, it can be concluded that the UK and wider European, Asian and US markets are, in general, either expensive, or, at best, keen.

Mike Keogh, Associate Director of Research, TH Real Estate, comments "It would be wrong to unfairly tag the entirety of the UK CRE market with this sweeping statement, as there are many other indicators that provide comfort, not just on pricing but also for continued good relative performance in the real estate sector. For instance, the UK economy has just recorded its twelfth consecutive quarter of growth and, whilst there are some well-documented headwinds, there is evidence of improving occupier demand. We believe that one asset class that could prove to be a shining star in this potentially challenging investment landscape is CRE debt."

Having become a regular feature of a balanced real estate (and arguably fixed income) investor’s portfolio, CRE debt remains a viable and compelling asset class in the UK. More conservative investors, or those looking for diversification, should participate in CRE debt, benefiting from its solid, stable and predictable income return. For instance, the February 2016 IPF Consensus Forecasts have annualised equity returns for UK real estate of 5.6% between 2016 and 2020; which is shy of the net 6-7% p.a. target IRR associated with the TIAA Henderson Real Estate Enhanced Debt Fund.

According to TH Real Estate, a further benefit of CRE debt is that even if the sponsor’s asset management or business plan is unable to achieve all the desired success, debt investors are still likely to receive their target returns as a result of the cushion to the asset value ranging between 15% to 50% depending on the debt fund. For instance, TIAA Henderson Real Estate Enhanced Debt Fund makes investments up to 75% LTV suggesting a minimum 25% buffer.

Christian Janssen, Head of Debt, TH Real Estate, adds "The UK economy is enduring some notable headwinds, both domestically and externally. Against this uncertainty, CRE debt provides significant real estate value downside protection, whilst matching core equity driven returns, but offering a stable, low volatility return profile with a relative value risk premium." 

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This document is intended solely for the use of professionals and is not for general public distribution. Any assumptions made or opinions expressed are as of the dates specified or if none at the document date and may change as subsequent conditions vary. In particular, the document has been prepared by reference to current tax and legal considerations that may alter in the future. The document may contain "forward-looking" information or estimates that are not purely historical in nature. Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer’s opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Nothing in this document is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. TH Real Estate is a name under which Henderson Real Estate Asset Management Limited provides investment products and services. Issued by Henderson Real Estate Asset Management Limited (reg. no. 2137726), (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN) which is authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored.

Michael Keogh

Mike Keogh

Director of Research

Mike's biography