A Pan-European approach at a time of high inflation



Andrew Gordon

Andrew Gordon

Head of European Real Estate Debt

Invesco Real Estate


Benefits of a pan-European approach to real estate debt investment at a time of high inflation

At a time of record inflation in many European economies, real estate debt as an asset class has the potential to act as a ‘triple hedge’ against inflation. Not only do real estate income streams have the potential to capture inflationary uplifts but debt strategies can comprise largely of floating rate loans and therefore will react to changes in interest rates. Also, the typical weighted average life of the loans is around four years, ensuring that the income and rent from the underlying collateral is re-based to market on a regular basis. Together, this makes European real estate debt a compelling investment opportunity.

In markets where interest rates are increasing, it is important to ensure underlying assets will be defensive against this market environment: asset quality and location, tenant and investment demand, business plan and sponsor expertise are essential building blocks to providing a resilient income stream.

In addition, it can be seen that investors further benefit by adopting a pan-European investment approach, limiting single-market exposure and helping ensure a more predictable and steady income stream. A truly regional approach offers diversification benefits as the asset class is fundamentally influenced by local drivers. For instance, the drivers behind a last mile logistics unit in France will be very different from student housing demand in the UK. Entirely new asset classes may also exist which are not found at home, such as self-storage, life sciences, and healthcare.

Real estate debt also has the potential to offer yield and diversification benefits coupled with reasonable capital requirements. It can provide portfolio diversification benefits versus both equity and bond markets, and also versus direct real estate, due to the specific value drivers of individual properties.

For some investors, a more crucial benefit is the fact that senior real estate debt is secured against an underlying property which serves as collateral and could offer a higher recovery rate than the typical corporate bond recovery rate, making it the most common private debt investment allocation for many investors, and is expected to continue to grow at a rapid rate.

Looking at European real estate markets today, it is evident that there has been some considerable disruption over the past two years, though the impact on some real estate valuations has, so far, been less than might have been expected given the scale of the GDP impact. Looking ahead, Invesco Real Estate expects robust occupier and investor demand for high-quality, well-located real estate across Europe. This is expected to translate into growing opportunities to lend against assets and the potential to generate attractive risk-adjusted returns at the portfolio level given that real estate debt can potentially enhance the risk and return of institutional portfolios – especially during an environment of high inflation.

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