PGIM Real Estate is planning to deploy $1 billion over the next two years in Australian real estate debt as it sees more compelling investment opportunities in the country.
The firm raised $300 million in the initial close for its first commingled debt strategy for both Australia and Asia-Pacific overall last week. PGIM will target senior development loans, gap financing and transitional real estate financing in Australia.
In terms of fundraising, the stability and transparency of the Australian market have helped to attract institutions looking to invest in Asia-Pacific, according to Steve Bulloch, head of Australia and Asia-Pacific real estate debt at PGIM Real Estate. He is seeing strong interest from Asian and European pension funds and other global institutional investors for the Australian real estate debt strategy, which has a $750 million target.
“The Australian market is well positioned with structural and cyclical drivers – population growth, significant infrastructure spends and limited supply which will continue to drive rental growth. In addition, the market is highly transparent, and public finances are in check,” he explained.
Bulloch told PERE that Australia has offered more compelling opportunities in real estate debt over the last 12 to 18 months.
“Given market dislocation and the sharp rise in interest rates, over the last 12 to 18 months many institutional investors see this as an attractive entry point to diversify their portfolios with real estate debt,” he said.
While Australian banks had been under regulatory pressure to reduce their real estate exposure even before the pandemic, they now face additional pressure because of declining asset valuations and higher interest coverage ratios for borrowers. The challenges affecting Australian banks have provided additional opportunities for non-bank lenders to fill the funding gap, according to Bulloch.
Aside from a larger opportunity set, Bulloch also sees more compelling returns in Australian real estate debt.
“Absolute return strategies can achieve solid returns and are benefiting from elevated base rates,” he explained. “Debt also offers significant downside protection, particularly for assets where asset capitalization rates have softened to a more reasonable level.”
The firm, which has a $108 billion assets under management global real estate debt business, previously invested in senior lending and high-yield debt in Australia and Japan via its global mandates. In Australia, PGIM Real Estate has deployed over A$5 billion ($3.4 billion; €3.1 billion) across both debt and equity since 2011.
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