With the continued growth of the global real estate crisis, debt from the economic collapse in the sector could be a diamond in the rough for the institutional masses, Mercer said Wednesday.
The Marsh & McLennan subsidiary stated in its Nov. 10 announcement that pension funds and fellow institutional investors can capitalize on options for “nonbank lenders to selectively and profitably bridge” the funding gap from the sector’s “significant value destruction.”
Mercer explained in the announcement that “after any crash there are opportunities in the purchase and workout of non-performing loans.” The global consulting, outsourcing and investment services firm stated that this opportunity lies within less risky new performing and mezzanine debt.
Furthermore, due to structural changes in the real estate market as a result of declining property values, the banking industry’s loan-to-value (LTV) ratios have been lowered, which have allowed for a “good position” to present itself for fund managers when “negotiating debt terms with borrowers, resulting in favorable returns for investors,” the press release said.
According to Mercer’s estimates, the U.S. funding gap is currently situated at $300 billion to $400 billion, with a more than $195 billion level in Europe, and about $8.8 billion in Australia.
David Nix, head of private real estate research in Mercer Investment Consulting’s Real Estate Boutique, explained in his comments that the firm believes that “this investment opportunity will exist until the funding gap in real estate has disappeared.” This is “unlikely” to because loans issued at the cusp of the market still have to be repaid, refinanced, restructured or foreclosed, Nix said.
Despite this support, Mercer notes there are “inherent risks.” Nix explained that investors should see how the opportunity fits within its investment framework, as well as instituting a thorough review of the best managers, the Wednesday release said.