Private real estate debt: An attractive opportunity for institutional investors

Key takeaways

• Private debt is widespread in the Anglo-Saxon world, as increasing regulatory requirements prompt banks to refrain from holding loans on their balance sheets.
  
  
• In Switzerland, there is a lack of corresponding opportunities for private debt investments, partly because Swiss banks tend to keep corporate loans on their own balance sheets. However, there is a niche in the mortgage sector due to stricter lending criteria, which in turn make private real estate debt funds more attractive.
  
  
• The 'Daneo Swiss Residential Property Debt Fund' provides institutional and professional investors with access to a diversified portfolio of subordinated financings in Swiss income-producing properties as an attractive complement to Fixed Income strategies.

Private debt on the rise

In the Anglo-Saxon markets in particular, there has been a diversified range of private debt investment opportunities for some years now. This is primarily driven by banks, which no longer want to hold their loans on their own balance sheets due to constantly increasing capital requirements and are therefore selling them on to institutional investors. In recent years, this trend has led to the establishment of ever larger investment vehicles, so-called private debt funds, which are increasingly not only taking on loans from banks, but also arranging loans themselves (direct lending). According to Wüest Partner (2024) and the industry association INREV (2023), by the end of 2023 there were 117 private debt real estate funds in Europe, of which 78% (91 funds) are structured as closed-end vehicles. Compared to 2016, this represents more than a doubling in the number of fund vehicles in Europe.

Number of funds and target volume in EUR bn

Sources: Wüest Partner (2024); INREV (2023)

New asset class for Switzerland

While private debt investments are already an important part of the asset allocation of institutional investors internationally, there is still a corresponding lack of private debt investment opportunities in Switzerland. This is primarily due to the banks, which still hold the majority of corporate loans on their own books and thus cover a large proportion of financing requirements. However, an interesting niche has opened up in the mortgage sector as a result of stricter lending regulations: Swiss banks' appetite for loans for investment properties has steadily declined over the last two years due to stricter lending criteria. Property investors are increasingly facing a financing gap, which they have to cover with other sources of financing, mostly equity. This trend will continue in the future. This is where private real estate debt funds offer an interesting alternative. Property investors can cover the part of the financing no longer offered by the banks via these alternative sources of financing and save themselves the use of expensive equity.

Financing gap among property investors

Opportunity for institutional investors

The 'Daneo Swiss Residential Property Debt Fund', which was launched in September 2022 by Artemon Capital Partners together with IFS Independent Financial Services, benefits from this emerging market niche. The fund offers institutional and professional investors access to a diversified portfolio of subordinated financing in investment properties in Switzerland. The financing provided by the fund is aimed at professional property investors and is always secured by mortgages, whereby only existing properties, mainly in the residential sector, are financed up to a maximum loan-to-value ratio of 80% of the property value. With a target gross yield of 6.00% p.a. and regular cash flow distributions (fixed income), the fund has an attractive risk/return profile in the current interest rate environment. The fund is subject to FINMA supervision and the investment strategy also qualifies as a traditional investment (receivables, mortgages) for institutional investors under BVV2. The fund is therefore particularly suitable for institutional investors as an attractive supplementary strategy in the fixed income segment.

For further information, please do not hesitate to contact us.

Sources

• Wüest Partner (2024): Real Estate Private Debt - Alternative Finanzierungen von Immobilien
• INREV (2023): Debt Vehicles Universe 2023

Disclaimer
This commentary is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities or financial instruments. The information contained herein is not intended to provide investment, legal, or tax advice, and should not be relied upon in making any investment decisions. Investing in securities involves risks, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, investors should carefully consider their own investment objectives, risk tolerance, and financial situation. The views and opinions expressed in this document are those of the author(s) and do not necessarily reflect the views of Artemon Capital Partners. Artemon Capital Partners does not guarantee the accuracy or completeness of the information provided herein, and disclaims any liability for any errors or omissions. Investors are advised to consult with their financial advisor or other qualified professionals before making any investment decisions.