“Life insurance companies, pension funds and others have...gotten comfortable with lower returns”
Venable partner Alen Aguilar was quoted in a September 11, 2013 Law360 article on the increased investment in real estate debt. Over the past 18 months, the potential for returns has justified the risk to private funds which have been increasing their investments. While the increase can be attributed to improvements in the real estate and investment markets, some argue that it comes from the proven ability of private funds to produce returns.
“The clock is ticking for borrowers to refinance, but doing so with a traditional lender will likely mean a 50 percent to 60 percent loan to value ratio because of hefty underwriting standards springing from the blow-back to the financial crisis and preparations for Basel III,” Aguilar said commenting banks’ desire to unload real estate debt. “Private funds are settling nicely into the space this has created, counting on the likelihood that these borrowers will opt for the mezzanine debt they can provide, even if it means lower returns for the funds,” he added.
Commenting on the overall trend, Aguilar said, “Life insurance companies, pension funds and others have psychologically gotten comfortable with lower returns and said to themselves, 'This is a new reality, this is what we now find to be acceptable’…They're willing to give up the upside for more consistent income.”