Traditional methods like direct property ownership and REITs (Real Estate Investment Trusts) are well-known. However, a new segment is gaining attention: private debt investment.
This alternate asset class, with its distinct characteristics, offers unique advantages and stable returns, capturing the interest of both seasoned investors and newcomers alike. In this blog, we’ll explore how to access private debt investment opportunities, specifically in commercial real estate debt. We’ll provide insights on diversifying your portfolio with this asset class which can help maximise returns and mitigate risks in this growing market.
Understanding private debt investments
A private debt investment refers to investors lending capital to private companies or individuals, often with the debt secured against collateral, such as real estate or other assets, to mitigate risk. Unlike public bonds or bank loans, private debt investments are typically not traded on public exchanges and involve direct agreements between lenders and borrowers. This asset class can include various forms of debt, such as mezzanine financing, bridge loans, and senior secured loans.
Why consider an investment in real estate private debt?
Considering a private debt investment can offer several compelling advantages for investors seeking to diversify their portfolios and achieve attractive returns. Some of the key reasons private debt investments is becoming increasingly popular amongst income-seeking investors include:
Private debt investments can often provide higher yields compared to traditional public debt instruments like bonds. This is largely due to the illiquid nature of the investment which can translate into better returns for investors.
Private debt investments typically offer regular interest payments, providing a stable income stream. This can be particularly attractive for investors seeking steady cash flow.
Including private debt in a portfolio can enhance diversification. Unlike traditional asset classes like stocks and public bonds, private debt tends to have little to no correlation with the public markets which can help reduce overall portfolio risk.
Many private debt investments are secured by collateral, such as real estate or other tangible assets. This security can help protect the principal investment and mitigate the risk of loss. Senior debt in particular sits as the highest, or most secured, layer of the capital stack. Senior debt is also commonly referred to as first mortgage secured loans, historically provided by traditional lending institutions such as banks and credit unions, but now also provided by non-bank lenders, like Zagga. Senior debt investors are given the highest priority in terms of repayment as the investment is secured by a mortgage over the property. This gives the senior debt lender recourse over the property in the event the borrower defaults on the loan
Some private debt investments, especially those with floating interest rates, can act as a hedge against inflation. As interest rates increase, the borrower’s rate also rises, leading to higher returns for investors.
While private debt investments offer many benefits, it’s important to consider the associated risks, such as credit risk, liquidity risk, and the need for thorough due diligence. Working with experienced investment managers and advisors can help mitigate these risks and enhance the potential for successful outcomes.
The market for private debt investment in commercial real estate debt
The commercial real estate debt market is vast and varied, presenting numerous opportunities for private debt investors. These investments typically fund new developments, property acquisitions, or the refinancing of existing property. The demand for private debt in real estate is driven by factors such as stricter bank lending regulations, the need for quicker turnaround and approval times, and bespoke financing solutions that banks may not be able to provide.
Read this case study for an example.
Conduct due diligence
Real estate private debt is a specialised asset class that requires a specialist investment manager with deep expertise and a core focus on risk management. Thorough due diligence is critical in private debt investment to ensure the credibility of investment opportunities. Real estate private debt has historically exclusively been invested in by large institutional investors, however seven years ago Zagga sought out to change this and democratise access for all investor types via our suite of bespoke solutions.
Investing with Zagga
As a boutique alternative investment manager, we pride ourselves in our ability to present high-quality investment opportunities.
We are also highly disciplined in scrutinising every transaction, selecting only those that fit our rigorous risk underwriting models.
Understanding investment risks: essential information
While real estate private credit investments offer enticing prospects, it is crucial to acknowledge that all investments carry risks. Different investment strategies may carry different levels of risk. Market fluctuations, liquidity concerns, regulatory changes, and specific risks related to each investment type should be carefully evaluated. Thorough due diligence, expert guidance, and a comprehensive understanding of the investment are essential for managing these risks effectively.
The risks associated with an investment in real estate private debt – either directly or via a real estate private debt fund – include possible delays in repayment and a substantial or complete loss of income or principal invested. There is no guarantee that an investment in real estate private debt will achieve its investment objective.
Check out our further information in our FAQs.
Conclusion
Private debt investment in commercial real estate private debt offers a compelling alternative to traditional investment strategies. By understanding the market, building a strong network, conducting thorough due diligence, and effectively managing your investments, you can unlock significant potential returns. As with any investment, it’s essential to stay informed and adaptable, continually refining your approach to navigate the evolving landscape of commercial real estate private debt.
