The launch of a non-traded REIT by global investment manager Invesco Real Estate comes at a time of growing interest in both private real estate investment vehicles and in real estate debt.
Called the Invesco Commercial Real Estate Finance Trust (INCREF), the private vehicle will focus on giving accredited investors an opportunity to invest in private real estate credit. Structured as a non-exchange traded, perpetual REIT, INCREF will originate, acquire and manage a diversified portfolio of commercial real estate loans and debt-like preferred equity interests.
INCREF’s launch comes amid growing demand from individual investors for opportunities in the private market that will allow them to optimize their risk-adjusted returns at a time of increased volatility. According to Kevin Gannon, chairman and CEO of investment banking firm Robert A. Stanger & Co., the past year brought a few launches of non-traded REITs, including Invesco, with companies announcing they were doing an SEC Rule 506(b) or a 506(c) deal (Invesco’s shares will fall under the 506(c) rule). Those types of filings tend to be easier because the firms involved don’t have to go through regulatory clearance with states’ blue-sky commissioners, and the vehicles aren’t subject to concentration limits that would cap investors’ allocations to a small percentage of their total net worth, Gannon said.
“In some of the blue-sky rules, some of the states limit you to 10% of someone’s net worth in alternatives, and private placements aren’t subject to that, so private placements are starting to file non-traded REITs like Invesco,” he said.
Year-to-date in 2023, the market saw two launches of public non-traded REITs, with an additional two launches pending, Robert A. Stanger data shows. That’s compared with five launches that took place in 2022. The list doesn’t include private non-traded/NAV REITs such as Invesco’s that are increasing in popularity. There are several of those in the works, according to Gannon.
Ultimately, Invesco opted to go with a private non-traded REIT structure for its new vehicle because of its appeal to retail investors, noted Charlie Rose, president and lead portfolio manager of INCREF and global head of credit for Invesco.
A non-traded REIT “is a familiar wrapper for the retail channel,” Rose said. “We offer monthly net-asset value, monthly valuations, monthly purchases and share repurchases. The governance is typical of non-traded REIT products, with an independent board of directors.”
Filing under SEC rule 506(c) also allows INCREF to potentially make up the majority of accredited investors’ allocations since it lifts the types of state concentration limits normally enforced for non-exchange traded perpetual life REITs, he noted, echoing Gannon’s assessment.
The caveats in today’s market are that fundraising for non-traded REITs has fallen dramatically over the past year, while redemption requests have increased, Gannon said. In 2022, fundraising for non-traded REITs totaled $33 billion, while this year’s total looks on track to reach only $10 billion to $12 billion, he noted. Meanwhile, redemption activity in the non-traded REIT space reached approximately $15 billion in 2022, and this year, might move closer to $20 billion.
“People asking for their money back is bigger in aggregate than the money we’re raising,” Gannon said.
Nevertheless, companies with widespread name recognition in the commercial real estate industry continue to launch new REIT products. “They are coming into this space, saying ‘I got talent as demonstrated by my institutional clients. I’m going to bring it to the retail side and give retail investors a chance to invest alongside the KKRs, Blackstones and Starwoods of the world.”
A survey of high-net-worth investors' intentions conducted in April 2023 by WMRE, found that 15% of financial advisors thought that accredited investors were highly interested in non-traded REIT structures.
Focus on credit
For those firms that do decide to go ahead with launching new investment vehicles today real estate credit happens to be a particularly attractive product to pursue. Current headwinds in capital markets have provided a compelling entry point for INCREF’s real estate's credit strategy, according to Rose.
INCREF will primarily focus on core-plus credit and invest in Invesco’s “highest conviction ideas” across the commercial real estate universe, including loans on multifamily, industrial, single-family rentals, and self-storage assets, Rose noted. In May, the REIT originated its first two loans, totaling $178 million in commitments: on an industrial property in Phoenix and on a multifamily property in Sunnyvale, Calif.
Private real estate credit is gaining the attention of accredited investors who are seeking strategies to access an asset class that has not traditionally been available to them, Rose said. Meanwhile, the pullback in lending by some regional banks, coupled with the significant increase in short-term interest rates, is providing a rare opportunity for alternative real estate lenders to step in to fill the financing gap, he added.
At $5 trillion, real estate debt is the fourth largest investable fixed-income asset class in the U.S., Rose said. Invesco, which has about $90 billion in real estate assets under management, started to make private real estate debt available to institutional investors coming out of the Global Financial Crisis. But the product has not been accessible at scale to high-net-worth investors. That is changing as private real estate lenders have steadily gained market share from historically dominant players like banks, insurance companies and government-sponsored entities (GSEs).
Recent research from Aeon Investments, a London-based credit-focused investment company, found that 85% of the wealth managers, pension funds, insurance asset managers and family offices it surveyed planned to increase their allocations to illiquid assets, including private debt and commercial real estate, over the next two years. More than 52% of those surveyed said that their primary motivation for investing in private debt was its potential to act as a hedge against inflation when it’s employed through loans with a floating-rate coupon. The survey included 101 senior investment managers and was conducted online in April of this year.
“We’re bringing this product to the accredited investor community because we’re hearing from financial professionals that the premium income profile and limited volatility, historically, of the asset class is attractive to high-net-worth investors throughout market cycles, but particularly through this period of uncertainty,” Rose said.
The U.S. commercial real estate industry is expected to experience record-high loan maturities over the next four years, increasing the scale of opportunity in real estate credit right at the same time as traditionally dominant players in the sector—the banks—may be pulling back, he added. That’s resulting in elevated spread levels at tighter than typical credit standards, making it an attractive entry point for new investors into the asset class.
“We are in this market of elevated base rates and reduced competition from the traditional dominant players to generate a premium income return from those investments,” Rose said. “The product itself is an income-oriented, downside-protected product that’s designed to perform throughout market cycles and, accordingly, is being offered on a perpetual basis.”
Another appealing feature for investors is that real estate credit tends to be a defensive asset class, Rose noted. Invesco focuses on secured loans, with loan-to-value (LTV) ratios no greater than 65% to 70% and three- to five-year floating rate terms.
The firm is also concentrating its efforts on institutional quality assets and institutional sponsorship in property sectors that offer the best long-term outlooks. At this stage, that includes primarily multifamily and other for-rent housing products, industrial and some specialty sectors.
These types of loans are consistent with what Invesco has invested in historically for its institutional clients, Rose noted.
Real estate credit is a top priority product type for Invesco, he added, as historically it provided a premium income return and low correlation to both real estate equity and fixed-income alternatives. Over a 10-year trailing period, private real estate debt has delivered returns in the 8% to 9% range, similar to core real estate equity “but with materially lower volatility,” he said.
“We view this as an asset class that is highly attractive, with a particularly interesting entry point in this period of dislocation. Accordingly, as a firm, we are putting a lot of resources behind this particular initiative and in fact we have committed $150 million of our balance sheet to the launch of INCREF as our conviction around this strategy.”
In Gannon’s view, with $20-plus billion in recent redemption activity, there’s a lot of capital that can be put back into the non-traded REIT space. Sophisticated players will figure out how to “gather that capital” and put it to work in more in-demand real estate sectors, such as credit and infrastructure.
“We’re seeing more novel things come out—more credit deals and more private equity deals and more infrastructure deals. You’re going to see a lot of capital get raised in those areas. It’s going to get shipped around a little bit, but you’re going to see a style shift this year into private placements, credit deals and other differentiated focused deals,” he said.