Why private property-backed credit shines right now

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David Maki, the co-head of private debt and head of capital markets for global real estate specialist manager Heitman, says he welcomes the new competition from other managers, “especially the sophisticated and intelligent competition”. It’s still a growing field, he says.

Maki, a frequent visitor from the US to Australia and New Zealand over the past few years, said last week in Sydney that more and more investors were saying that they needed to be part of the real estate-backed private credit trend. “The new and growing competition is probably what has changed most in this area over the last 12 months,” he said.

He also said that Heitman was looking to participate in the “middle market” in Australia by investigating a potential listed investment company for one of its private real estate debt strategies, given the “lowest interest rates in history” and the strong demand for consistent income and stable capital.

Heitman, a Chicago-headquartered privately controlled company with an Australian office in Melbourne, has been investing in real estate, through private and public markets in both debt and equity, since its formation in 1966. It has about A$64 billion under management globally and A$4.1 billion sourced from Australia, with about A$500 million of that invested in its debt strategies.

In the current environment private credit is a sought-after asset class. Maki argues that real estate-backed private credit provides an additional level of security for investors who feel the rest of the market, particularly equities, are a bit “toppy”.

Of all the relevant indices, such as various fixed interest indices, all have seen their spreads come in during the past year or so. He says that more people are turning to private credit, given the low yields in more traditional fixed income instruments, and recognising that private credit real estate is a bridge between fixed income and growth assets.

“Underpinning our recent successes is that almost everybody who has invested with us has continued with their real estate debt or real estate equity program, but when they have looked to add to it or diversify, they have looked at real estate credit. “With very few exceptions, we haven’t seen people selling out of real estate equity, but rather adding to it with real estate credit,” he said.

He said: “If you want to be in real estate debt, we believe it’s important that you have an experienced team in real estate and that is the only asset class that Heitman focuses on.We are more focused than general credit investors,” he said. There had been some erosion with covenants in the space with the term coined as ‘covenant lite’. “Real estate has always been covenant driven by its nature. It’s reliant on it. Other things are less tangible than property,” Maki said.

The current big trends in global property, which Heitman looks to gain effective exposure to, include multi-family living (apartments), storage, aged care facilities and student housing. There is also a trend to repositioning retail and having logistics endeavours added to the warehousing market. A newer one is a move to redevelop carparks for other purposes. Whatever your view on global warming, it’s a good bet there will be fewer cars on the road in coming years.

Beau Titchkosky, Heitman’s Melbourne-based managing director for Australia and New Zealand, said that Heitman was also talking to some of its investors about launching a global closed-end fund, which would be separate from an Australian LIC. “One of our largest investors around the world is an Australian-domiciled fund,” he said. “In Australia there is a heightened demand for consistent income streams with our ageing population and record low interest rates.”

Maki spoke last week at the i3 (Investment Innovation Institute) real estate conference, run by Teik Heng Tan, in Melbourne.

– G.B.

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