Premium
Investing in Real Estate Debt: Is it Real Estate or Fixed Income?
Author(s) -
Spek Maarten
Publication year - 2017
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12112
Subject(s) - real estate , capitalization rate , debt , finance , market liquidity , real estate investment trust , economics , business , financial economics , monetary economics
This paper will analyze the risk return profile of real estate debt. Using a Monte Carlo simulation model, different debt layers (mezzanine and senior) are analyzed and compared to real estate investments. The results clearly show that senior debt is not heavily correlated to real estate and therefore behaves more like fixed income and should be valued accordingly. Mezzanine, however, is correlated to real estate, especially the downside, and should clearly be underwritten as such. Furthermore, due to a scarcity of finance, debt can show superior risk return characteristics over direct real estate and private funds. This scarcity is likely during periods of thin liquidity and uncertain valuations on the balance sheet, as recently demonstrated by the global financial crisis.