Real Estate

The Evolving Opportunity in Real Estate Debt

March 2023 – 5 min read

While the current landscape may be challenging to navigate, it is also shaping a compelling opportunity in real estate debt—from core to opportunistic lending.

There are a number of risks facing real estate today—from a macro environment characterized by higher rates and persistent inflation, to structural changes in investor demand, particularly for sectors like office. However, the significant increase in base rates over the last six to nine months, combined with wider spreads in the market, has also resulted in a more attractive risk-return profile for real estate debt. This suggests that while the current landscape may be difficult to navigate, it is also presenting select compelling opportunities across the asset class.

A Murky Picture on Valuations

Against the challenging backdrop, transaction volumes in the U.S. real estate market have fallen precipitously (Figure 1), and it is a similar case in Europe. Given the expectations for lower interest rates in the future, there is less refinancing activity in the market. At the same time, financing for new acquisitions—which can make up around 40–60% of the pipeline—has all but disappeared. With fewer transactional data points, the picture on underlying real estate valuations is murky—and depending on how the macro picture evolves, there could be continued pressure on capitalization rates and property level cash flows. This uncertain environment has led to a pull back from traditional lenders such as banks and insurers who are facing potential challenges with their existing portfolios. That said, it appears to be a great time to be a lender if you have dry powder and can structure around the current risks.

Figure 1: U.S. Transactions Have Fallen Back to Pandemic Lows

the-evolving-opportunity-chart1.jpgSource: Bloomberg, Federal Reserve, NAREIT, NCREIF. As of December 31, 2022.

Want to read the full article?

View PDF

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

Related Viewpoints