Large investment firms worldwide are taking an interest in real estate debt. While banks are backing away, some of the globe’s most prominent investors plan to double down on their commercial and residential real estate holdings. 

Isabelle Scemama, who heads up AXA’s 183 billion euro ($198 billion) alternative investments arm, said, “If I look at our strongest bet currently, it’s probably real estate debt.” This sentiment was echoed by U.S. fund firms PGIM, LaSalle, and Nuveen, Canada’s Brookfield and QuadReal, Britain’s M&G, Schroders, and Aviva, and France’s AXA. These funds expressed to Reuters that they plan to increase their credit exposure to property. The most common areas of interest are data centers, multi-family rentals, and the high-end office market. 

Banks are currently much more cautious about investing in real estate debt. The housing market is still in its biggest slump since the 2008 financial crisis. U.S. regional banks are struggling to stay open, and many have been forced to close because of customers unable to repay loans. Real estate loans have been the worst offenders. “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. New global standards for banks, dubbed the “Basel Endgame,” have also opened up the market further.

Other non-bank lenders, like private equity firms and the fund management arms of central banks, are also jumping at this opportunity. Apollo Global Management launched its first real estate debt fund, targeting one billion Euros this year. This week, Goldman Sachs Asset Management announced that it has closed its largest real estate credit fund, coming in at $7 billion of lending capacity. In Britain last year, non-bank lenders accounted for 41% of real estate loans, more than doubling over the past decade, according to data from the Bayes Business School. The data shows the same trend across Europe, where non-bank lenders accounted for approximately 20% to 30% of real estate loans.

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“I do find it quite worrying that [invested] pension money is affected and funds can do whatever they want, and it goes under the radar,” commented Bayes Business School senior research fellow Nicole Lux. European Central Bank Vice-President Luis de Guindos agrees with this concern. In March, he said financial stability in the region was being risked by the exposure of non-banks to commercial real estate. Regulators share these worries because of the softer rules and limited transparency required of private funds. Investment funds participating in lending is called “shadow banking,” a term that illustrates the secretive processes concerning regulators. Default and contagion risks are more common when private funds get involved in lending.

However, alternative lenders embrace the situation and are optimistic that the real estate market will soon turn around. Jack Gay, global head of debt at Nuveen, commented, “Historically, through real estate cycles, you would find that loans made at the bottom of the cycle generally tend to have the lowest delinquency rates and the highest spreads.”