KKR: Real estate credit opportunity “compelling”
KKR has described the opportunity in real estate credit as “compelling” due to an increase in transactions and a scarcity of capital.
In a new report, the global investment firm said that the sector has the potential to create opportunities both in the near term and long term to earn equity-like returns on real estate debt.
“All told, we believe this will be an attractive vintage for real estate credit,” said KKR’s Matt Salem, head of real estate credit, and Dakota Sagnelli, a principal in the real estate strategies team.
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“We see real estate credit as a compelling, evergreen opportunity to diversify both real secured equity holdings and the credit component of a portfolio with a high-yielding asset backed by real property and benefiting from a structural decrease in the availability of capital.”
Salem and Sagnelli added that they believe valuations have bottomed out both in the US and in Europe, while commercial real estate transactions have increased meaningfully. This is due to a combination of factors, including the expiration of a large number of interest rate caps dating back to the pandemic. As property owners look to refinance, they will be doing so in a higher-rate environment and at lower valuations, which drives pressure to sell, Salem and Sagnelli said.
Furthermore, the KKR executives said that banks are “parked on the sidelines in the US”, which leaves a funding gap of approximately $300bn (£228.17bn) in the sector.
“While US banks are reluctant to lend on their own balance sheets, they are lending to other real estate lenders, including private debt funds and mortgage REITs, through back leverage facilities,” they noted.
“For banks, this type of lending is more capital efficient, less time intensive, and may be seen as less risky.”
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Finally, Salem and Sagnelli said that they believe current conditions are favourable for real estate credit as the market will be lower risk than previous vintages. This is due to the trend for lower loan-to-value ratios for new originations, and yields remaining elevated.
“We are optimistic about the current environment for real estate credit investing, even at a time when interest rates are likely to come down,” they concluded.
“A growing number of commercial real estate transactions should increase the number of opportunities to lend, while the dearth of bank capital should keep yields attractive and spreads relative to corporate credit elevated.”
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