Fixed Income Managers Express Their Love For Real Estate Debt
But now, the managers note the assets are attractive both in their own right, and given the death of yield in mainstream fixed income.
Yields on real estate debt has proven less affected by central banks' various stimuli than debt and credit.
As new entrants come looking at securities backed by residential and commercial property mortgages (RMBS and CMBS), specialists in the arena argue gains are still to be made.
The enthusiasm of diversified managers is clear.
Richard Ford, European head of fixed income at Morgan Stanley Investment Management, said recently US non-agency mortgages top his team's conviction list, and his company is considering launching a US MBS strategy, comprising about 50% non-agency MBS and 50% traditional instruments.
Tim Haywood, head of GAM's $14bn fixed income unit, made money shorting US RMBS between 2006 and 2008, but says he is raking the same market now for long ideas.
Diversified property fund investor AEW Europe is involved in real estate debt via a European loan fund it launched in July, and CIO Rob Wilkinson says the emergence of property debt is "potentially the most significant thing to impact on the real estate investment business since comingled funds in the mid-1990s.
"We see huge opportunities in real estate debt as capital evaporates within the banking market, and pensions and insurers are becoming more interested in being alternative real estate financiers," he says, adding between 400bn and 1trn of real estate debt in Europe alone will soon need refinancing.
The market could receive a further boost via a European Central Bank initiative, the European DatWarehouse launched last month [NOV] to provide for loan-by-loan information accessible by asset-backed securities market participants.
Even ahead of all this, MBS funds were already profiting.
They made 10.7% this year to August, while the average hedge fund returned 3.94% and the average fixed income hedge fund made 7.75%, according to database eVestment Alliance. Funds investing in both agency and non-agency MBS were the best performing securitized credit sub-classification this year, up 16.4%.
Shamez Alibhai, manager of the Real Estate Credit Investments' fund of Cheyne Capital, says real estate debt is attractive both in terms of its absolute returns and in terms of the spreads of property bonds and loans over more mainstream fixed income assets.
On the first count, he is supported by the fact RECI's total return comprising NAV growth plus dividends is 40% this year, and few argue that core debt holdings now offer more risk than return. Spread tightening for corporate bonds suggests the same is also increasingly the case for credit.
Alibhai says: "There has been strong demand for credit, driven by the fact that yields on highly rated government bonds have collapsed with the announcement of QE3 [in the US], the OMT programme [in Europe], the Bank of England's own QE program, and Japan increasing its QE program again. In the developed world there is a substantial amount of liquidity driving down government bond yields to historically low levels. It is putting a lot of pressure on traditional fixed income investors."
Not surprisingly, the hunt for an acceptable yield has led many of them to RMBS and CMBS markets. Today, they find yields 150bps to 300bps higher than that on core debt, and about 200bps over European high yield.
Alibhai believes the markets he invests in remain dislocated, even after investor demand and stimulatory measures also affected real estate debt.
The boost in prices is demonstrated by the fact that RECI recorded fair value gains on its portfolio of 6.7m in the September quarter, and in October it could sell 4.5m of bonds at an average 93% of par, having bought them on average at 81% of par earlier.
The fact more room could be left for appreciation emerges from the fact the bonds RECI bought last quarter were purchased on average 22% below par, and that Alibhai plans to allocate 20% to 25% of the company's gross asset value to real estate loans over the coming two quarters, leaving RECI "close to fully invested".
Alibhai says newfound interest among more investors has increased liquidity in his universe, and the real estate debt team at Cheyne sold 50m of bonds in November without excessive slippage.
Returns from RECI come partly by buying, holding and receiving healthy coupons, partly by early repayments - between April and September RECI received repayments equivalent to 20% of its total balance sheet - and partly by capital gains.
Alibhai says the new investor interest in the markets has been deep - aiding liquidity - and broad, ranging across different classes of instruments.
Consequently Alibhai's team has applied its analysis more often down the spectrum. Whereas in June almost all RECI's purchases were of class A and B instruments, by September this category accounted for only 40%.
"We have seen fixed income managers coming into Class A CMBS and RMBS [instruments]. We think there is still value to be had in Class B and below, and we can capitalise on that with our experience."
Buyers of RECI shares can gain access to the asset class, and also the experience of Alibhai and his team, at a 24% discount to NAV.
Yields on real estate debt has proven less affected by central banks' various stimuli than debt and credit.
As new entrants come looking at securities backed by residential and commercial property mortgages (RMBS and CMBS), specialists in the arena argue gains are still to be made.
The enthusiasm of diversified managers is clear.
Richard Ford, European head of fixed income at Morgan Stanley Investment Management, said recently US non-agency mortgages top his team's conviction list, and his company is considering launching a US MBS strategy, comprising about 50% non-agency MBS and 50% traditional instruments.
Tim Haywood, head of GAM's $14bn fixed income unit, made money shorting US RMBS between 2006 and 2008, but says he is raking the same market now for long ideas.
Diversified property fund investor AEW Europe is involved in real estate debt via a European loan fund it launched in July, and CIO Rob Wilkinson says the emergence of property debt is "potentially the most significant thing to impact on the real estate investment business since comingled funds in the mid-1990s.
"We see huge opportunities in real estate debt as capital evaporates within the banking market, and pensions and insurers are becoming more interested in being alternative real estate financiers," he says, adding between 400bn and 1trn of real estate debt in Europe alone will soon need refinancing.
The market could receive a further boost via a European Central Bank initiative, the European DatWarehouse launched last month [NOV] to provide for loan-by-loan information accessible by asset-backed securities market participants.
Even ahead of all this, MBS funds were already profiting.
They made 10.7% this year to August, while the average hedge fund returned 3.94% and the average fixed income hedge fund made 7.75%, according to database eVestment Alliance. Funds investing in both agency and non-agency MBS were the best performing securitized credit sub-classification this year, up 16.4%.
Shamez Alibhai, manager of the Real Estate Credit Investments' fund of Cheyne Capital, says real estate debt is attractive both in terms of its absolute returns and in terms of the spreads of property bonds and loans over more mainstream fixed income assets.
On the first count, he is supported by the fact RECI's total return comprising NAV growth plus dividends is 40% this year, and few argue that core debt holdings now offer more risk than return. Spread tightening for corporate bonds suggests the same is also increasingly the case for credit.
Alibhai says: "There has been strong demand for credit, driven by the fact that yields on highly rated government bonds have collapsed with the announcement of QE3 [in the US], the OMT programme [in Europe], the Bank of England's own QE program, and Japan increasing its QE program again. In the developed world there is a substantial amount of liquidity driving down government bond yields to historically low levels. It is putting a lot of pressure on traditional fixed income investors."
Not surprisingly, the hunt for an acceptable yield has led many of them to RMBS and CMBS markets. Today, they find yields 150bps to 300bps higher than that on core debt, and about 200bps over European high yield.
Alibhai believes the markets he invests in remain dislocated, even after investor demand and stimulatory measures also affected real estate debt.
The boost in prices is demonstrated by the fact that RECI recorded fair value gains on its portfolio of 6.7m in the September quarter, and in October it could sell 4.5m of bonds at an average 93% of par, having bought them on average at 81% of par earlier.
The fact more room could be left for appreciation emerges from the fact the bonds RECI bought last quarter were purchased on average 22% below par, and that Alibhai plans to allocate 20% to 25% of the company's gross asset value to real estate loans over the coming two quarters, leaving RECI "close to fully invested".
Alibhai says newfound interest among more investors has increased liquidity in his universe, and the real estate debt team at Cheyne sold 50m of bonds in November without excessive slippage.
Returns from RECI come partly by buying, holding and receiving healthy coupons, partly by early repayments - between April and September RECI received repayments equivalent to 20% of its total balance sheet - and partly by capital gains.
Alibhai says the new investor interest in the markets has been deep - aiding liquidity - and broad, ranging across different classes of instruments.
Consequently Alibhai's team has applied its analysis more often down the spectrum. Whereas in June almost all RECI's purchases were of class A and B instruments, by September this category accounted for only 40%.
"We have seen fixed income managers coming into Class A CMBS and RMBS [instruments]. We think there is still value to be had in Class B and below, and we can capitalise on that with our experience."
Buyers of RECI shares can gain access to the asset class, and also the experience of Alibhai and his team, at a 24% discount to NAV.
