APG ventures into real estate debt in APAC – Exclusive

The Dutch pension fund manager has picked Australia for its first real estate debt investment in Asia-Pacific.

Pension fund manager APG Asset Management has entered into a partnership with Australian commercial real estate debt manager MaxCap Group to invest up to A$600 million ($418 million; €370 million) in the sector, marking the investor’s entry into the asset class in Asia-Pacific.

Amsterdam-headquartered APG has made a A$300 million initial commitment to the JV and can re-up to a total commitment of A$600 million. The partnership will target first mortgage stretched-senior loans, with a focus on construction lending across different real estate sectors in Australia. It has already committed the first seed loan to a mixed-use development in Melbourne.

Graeme Torre, managing director and head of private real estate for Asia-Pacific at APG, told PERE that foraying into the space allows the manager to access new sectors by taking on relatively less risk.

With over €2 billion in strategic real estate assets under management in Australia, the debt strategy will help APG diversify its existing equity portfolio in the country, he added.

Torre also told PERE that the gap between the returns generated by the debt and equity position for the same asset is now narrowing in Australia, partly because of the opportunities created by the pullback in traditional bank financing. The country’s banks have been retreating from lending to real estate developers since the financial services regulator Australian Prudential Regulation Authority took a stricter approach on cutting institutional lending in 2015.

“The opportunity to make acceptable returns from real estate debt has significantly improved due to a number of factors but largely because of the withdrawal of mainstream banks from this sector. Borrowers have therefore turned to the private equity market and readily accept the required returns of those lenders in order to continue making investments,” Torre explained.

In Australia, stretched-senior loans allow the lender to have up to 75 percent loan-to-value ratio and typically generate returns in the double-digits.

Wayne Lasky, founder and managing director at MaxCap, told PERE the real estate debt market in Australia is still in its early cycle as investments by global investors have been relatively modest.

Senior debt opportunities have only become more evident in the past 12 to 18 months due to the dislocation in the market, he added. Previously, most opportunities for private debt lenders were limited to the mezzanine financing market.

“Capital currently committed to the asset class is akin to a trickle out of a dam wall compared to the size of the market opportunity. I expect we will witness a stronger velocity of funds seeking to take advantage of the asset class in Australia over the coming five years at least,” said Lasky.

APG started investing in real estate debt in Europe and the US five years ago and has built up an AUM of over €1 billion in real estate debt globally. The investor plans to expanding its footprint to Asian countries over time.

“Private real estate debt appears to be a growing sector. We will look to do more in this particular sector and not just in Australia. We may also consider China, Korea and other markets in the region,” said Torre.