Real estate debt funds are a big part of the investment world. They help connect real estate developers with short-term capital for real estate projects. Many big funds across Europe have seen impressive returns in recent years. How can a virtual data room help?
The value proposition of real estate debt funds is real and offers lucrative opportunities to investors. These pools of private equity-backed capital are a great financing tool for real estate developers as well. But the unique characteristics of real estate debt funds make fund management a key issue.
Real estate debt funds generate income through interest on the lent capital with the real estate asset as possible collateral to underlie the loan. Due to market conditions, interest rates (especially since the invasion of Ukraine), debt is now getting more expensive and changing almost daily, no matter if you are a buyer or a seller – both sides are affected and successful deal closing is more difficult than usual. The funds still have to sell, which means investment returns are either adjusted (by the buyer) or the price is reduced (by the seller).
In addition, most real estate debt funds focus on specific real estate space. You might have funds that only focus on commercial real estate for family housing or retail space. Using a virtual data room to allocate different teams for different assets can make it easier to understand how the assets are performing.
What are the three major ways virtual data rooms can enhance real estate debt fund performance?
1. Improve access to assets and speed of dealmaking
Real estate debt funds have become popular ever since the financial crash in 2008. Traditional lenders such as banks had major liquidity issues and commercial real estate credit slowed down. Regulation immediately after the crisis also put out additional restrictions on traditional lenders and private lenders, including real estate debt funds, stepped up to fill this enormous lending gap.
Real estate and other debt funds can meet businesses’ needs for capital much faster. The ability to react and streamline processes is especially useful in the real estate space. In recent months, the Covid-19 pandemic has added an additional element to dealmaking in two ways. First, the markets have been more uncertain. Market behaviour has been hard to predict and portfolios have required careful monitoring. Virtual data rooms make it easier to push through deals quicker, as the required information is always updated and at hand.
The second major part of current dealmaking has been the lack of face-to-face meetings. Virtual work became the norm for many industries. Virtual data rooms allow you to gather accurate information in different formats.
2. Enhance due diligence
Risks in real estate involve developing a strong understanding of the borrower’s business plan as well as the asset’s performance. Virtual data rooms can help manage and control the risk.
A virtual data room helps with:
- Identifying the needed documentation. You can gather all needed documentation in one place, making the due diligence process faster.
- Ensuring compliance, no matter the location. Different regions have different national and global compliance requirements, especially in real estate debt. A virtual data room can help you monitor that documentation is compliant.
- Keeping information updated. Deals can take long to complete. With data rooms, updating and managing information flow becomes second nature. You can ensure all developments are instantly logged to speed up the process.
3. Enhance compliancy to boost value
One of the most interesting parts of mitigating risks and yielding high returns comes from things like ESG implementation. The real estate sector is starting to utilise ESG better due to the realisation of its benefits. In general, ESG has morphed from a niche tool to a core part of a good investment strategy. Standard Chartered estimates that around $1 in every $4 is currently invested in ESG, meaning more asset classes understand the benefits it brings. According to BloombergNEF data, green bonds and loans along with other types of sustainable debt stood at $465 billion in 2019. This was a 78% increase from figures the previous year.
For real estate, ESG implementation can be a key factor in differentiating in a crowd. Regulations around construction have been tightening around Europe. Energy efficiency and sustainability are now part of the toolkit for real estate developers. For real estate debt funds, this can mean more compliance issues to manage.
Implementation and enforcement of sound ESG measures might not be the easiest for the lending side. The awareness around ESG matters is growing. Lenders can make decisions based on comprehensive due diligence. But having the information secured via virtual data room can make ESG issues and compliance an easier part to integrate.
The bottom line
Real estate debt funds occupy a central role in the market. They rose to prominence as a convenient and high yielding asset class after the financial crisis. But their march to popularity is not likely to end anytime soon. However, real estate debt funds require plenty of risk management. There needs to be careful consideration and a proper understanding of the available opportunities. But things like ESG compliance could be a key to fund attractiveness as well as value creation. By implementing the right strategy with your fund and focusing on due diligence, real estate debt can be a great addition to any portfolio and property management toolkit.