Large investment funds eye office and data centre projects now interest rates are about to turn

Betting on real estate debt is not for the faint-hearted. The global commercial property industry, in particular offices, is still in the grip of its biggest slump since the 2007-2009 financial crisis.

Large investment funds have heightened their focus on office and data centre projects now interest rates are about to turn.

US fund firms PGIM, LaSalle and Nuveen, Canada's Brookfield and QuadReal, the UK’s M&G, Schroders and Aviva, and France's AXA all told Reuters they plan to increase their credit exposure to property.

Most are focusing on lending to logistics, data centres, multi-family rentals and the high-end office market. The office sector more broadly continues to struggle, deterring funds.

"If I look at our strongest bet currently, it's probably real estate debt," said Isabelle Scemama, who heads up AXA's €183bn alternative investments arm.

Betting on real estate debt is not for the faint-hearted. The global commercial property industry, in particular offices, is still in the grip of its biggest slump since the 2007-2009 financial crisis.

But alternative lenders believe the worst may have passed and they can generate attractive returns as valuations recover.

"Historically through real estate cycles, you would find that generally loans made at the bottom of the cycle... tend to have the lowest delinquency rates and the highest spreads," said Jack Gay, global head of debt at Nuveen.

Stricter capital rules for banks — including new international standards dubbed the 'Basel Endgame' — and US regional bank failures have opened the market further, fund firms said.

"The challenges faced by the banks have really led to a decrease in direct [loan] originations for commercial real estate," said Nailah Flake, managing partner in Brookfield's Real Estate Group, which sees opportunities to lend more.

Private equity firms are also weighing in. Apollo Global Management launched its first dedicated European real estate debt fund targeting €1bn this year, a source familiar with the matter said.

- Reuters