The ongoing credit crunch has led to a huge number of high-yield real estate debt funds trying to cash in on the distress: There are now close to 70 such funds, and they are attempting to raise US$40 billion. Some are veteran investors that have operated in real estate debt for 20 years or more, but many others are newcomers. The funds use different strategies, usually including some combination of CMBS, mezzanine, preferred equity, whole loans, B-notes, RMBS and, increasingly, originating new loans.
Institutional investors are cautiously entering the debt arena. For example, the Los Angeles City Employees’ Retirement System (LACERS) has committed US$60 million to four high-yield real estate funds; US$25 million of that is committed to Walton Street Real Estate Fund VI, which targets both debt and equity opportunities domestically, as well as in India and Mexico. LACERS has other real estate debt investments as well, including ING Clarion Partners’ CMBS fund. Dan Gallagher, CIO at LACERS, says, “Liquidity has drained out of the debt markets, beginning with the subprime mortgage crisis. Even high-quality borrowers who are current on their debt payments have been impacted, and have had difficulty borrowing money to refinance maturing loans. Demand for liquidity outstrips supply, and we believe that investors will be rewarded for providing liquidity in a liquidity-starved market.”
