Real estate investment giants Goldman Sachs and Principal Real Estate Investors are launching efforts to raise capital from individual investors to deploy into originating and buying property loans.
The capital raising will come through the formation of nonlisted, publicly offered stocks in new real estate investment trusts. Such nonlisted REITs have become a favored fundraising method for the nation’s largest institutional investors.
The lists of such institutional firms that have launched nontraded REITs recently include Cohen & Steers, ElmTree Funds, EQT Exeter, Fortress Investment Group, JPMorgan Chase and Morgan Stanley, all of which have begun acquiring properties in the past 12 months.
“The biggest interest driver right now is the thought that property valuations have bottomed out or are getting close to bottoming out in the near future,” Luke Schmidt, vice president of research for Blue Vault Partners, told CoStar News in an email.
That has these big-name firms “setting the table” so that when more opportunities begin to present themselves, they can take advantage of them, Schmidt said. Blue Vault specializes in alternative investments research.
Goldman Sachs and Principal will be targeting debt investments rather than properties in their new REIT funds — Goldman Sachs Real Estate Finance Trust and Principal Credit Real Estate Income Trust — both of which filed paperwork for the REITs late last week with the Securities and Exchange Commission.
Nontraded REIT securities are publicly offered to accredited investors but are bought and sold in private transactions, with their values set by the net value of holdings and the number of shares outstanding. As a REIT, they offer investors the potential of high returns and tax benefits.
Quarterly growth
Commercial real estate debt investing has gained favor in the past two years of high interest rates. Fundraising for real estate debt just posted the strongest quarter-on-quarter growth as investors pour capital into funds that finance property deals or buy existing loans. The amount surged to $9.1 billion in the second quarter from $2.3 billion in the first quarter, according to Preqin, a London-based investment data company.
“We believe the current market for real estate credit is characterized by a material and growing supply and demand imbalance, creating attractive opportunities for alternative lending sources that can provide certainty of execution to borrowers,” Goldman Sachs’ filing said. “Despite the contracted supply of real estate credit, we expect the demand for credit to remain strong as upcoming loan maturities will necessitate new capital.”
Goldman Sachs said it believes it can take advantage of opportunities as banks have boosted their capital set aside to cover potential bad debt and have sought to reduce exposure to direct real estate lending.
“Given that traditional lenders are primarily focused on financing more liquid, stabilized assets, we believe an opportunity exists to finance transitional projects where lender appetite may otherwise be more limited,” Goldman Sachs said.
Feeding a need
In its filing, Principal said it expects borrowers will turn to nonbank sources to fill the capital gap.
“Borrowers will seek higher leverage loans with 60-80% loan-to-values from non-traditional lenders and pay an enhanced spread to attain desired loan proceeds,” Principal said. “The opportunity is broad based and reaches across the capital stack, impacting both senior and subordinate debt.”
The opportunities in commercial real estate debt investing have spilled over into other nontraded REITs that were originally formed primarily to target property investments.
Last week, J.P. Morgan Real Estate Income Trust originated a $62.4 million mortgage loan to Raith Capital Partners to finance the acquisition of Satori West Ashley, a 297-unit multifamily property in Charleston, South Carolina.
“This transaction demonstrates our ability to invest across the capital structure to deliver attractive returns," Doug Schwartz, co-president of J.P. Morgan Real Estate Income Trust, said in a statement.