Heitman, the global real estate investment management firm, has taken on its first Australian client commitment to its US real estate debt business, which is one of the fastest growing set of strategies for the firm. There are several reasons for the popularity, according to David Maki.
Maki, a senior managing director in private real estate debt and co-portfolio manager, has become a frequent visitor to Australia in the past two years, where Heitman has opened an office in Melbourne.
He said on a trip last week, with James Gruver, Chicago-based managing director of client service and marketing, and joined by the Melbourne-based Beau Titchkosky, managing director of client service and marketing for Australia and New Zealand, that a common question among the firm’s seven current Australasian clients was: “where are we in the cycle?”.
“The fundamental assumption for our business is that we are in the late stage of the cycle in the US. It’s been such a long stage, in recovery, that it feels like a later stage, be we just don’t know exactly where,” he said.
Gruver, a naturalised Australian currently residing in Chicago, said that a lot of investors were preferring real estate debt over equity because of that question over where we were in the cycle.
Some investors had shown a preference for investing in the property debt markets at this point in the cycle, he said, due to shorter duration of private debt investments and the complementary nature of private real estate debt to private real estate equity.
Maki said:” In [private]equity there are core, value and opportunistic strategies. That’s well understood. Well, you can do the same in private debt. We are now seeing more core-like debt strategies coming to the market. Investors seem to wanting to take less risk.”
Heitman, which has been in the private debt real estate business for about 10 years, is now seeing a lot more competition. Maki estimates that there are bout 100 managers offering private real estate debt strategies.
For big investors, a positive by-product is that spreads between bank offerings and those of fund managers have narrowed. “The increased competition has had a meaningful impact on spreads,” Maki says. “And the reduction in spreads has helped ease the impact of the Federal Reserve’s increases in rates. The spread component of the loans is now smaller. It’s attracting more of an institutional element. The difference between us as lenders and the banks is narrower.”
The private debt market is evolving and for the real estate-backed investments there is a trend to “specialist” sub-sectors, which match broader demographic trends. For Heitman, this has meant a concentration in recent years on things like seniors housing, student housing and storage.
Storage, the demand for which tends to be around life events, can be big business, especially in the US. For instance, Heitman has a $102 million loan pending for a storage company with nearly 9,000 units spread across 22 properties. A part of the loan is earmarked for expansion.
The firm studies possible future trends, as most managers do, but from a different standpoint. With the possibility that driverless cars will mean less individual car ownership, for example, it could mean that more garage space will become available in place of self-storage, at least for the short term.
Titchkosky says that the specialty segment of the market tends to be more defensive in nature. We’ve done US$1.8 billion in loans for our latest debt vehicle and the acceptance of this as a viable investment strategy is now worldwide. The tailwind behind the private space seems to be increasing all the time.”
Maki said: “The whole point of a loan strategy is to get your money back so we always take a conservative underwriting position. We are a natural by-product of the real estate investment business and need to factor in changes in markets and property sectors.”