Education

Art 1
City 5


Investment Opportunity

A considerable prospect exists within the U.S. commercial real estate market, encompassing a vast investment potential of $5.8 trillion spread across various property types and geographic locations.

Commercial Real Estate Debt (CRED)

Grasping the potential for income generation and portfolio diversification through CRE debt investments.

  • INCOME-DRIVEN ASSET CLASS

    Income has predominantly steered the performance of commercial real estate debt, experiencing minimal credit losses, even amidst the peak of the Great Financial Crisis. Credit losses transpire when a lender fails to receive the complete scheduled interest and principal payments. Since 2007, income has consistently surpassed credit losses, leading to annual positive net returns for this particular asset category.

  • INVESTING ON TOP OF THE CAPITAL STRUCTURE

    Investors investing in commercial real estate debt act as financiers for property owners seeking funds to acquire, refurbish, or repurpose a property. These CRE debt investors have the right to collect the property-generated income before the property owner. This payment precedence can safeguard the income and initial investment of CRE debt investors, particularly in times of market downturns.

  • THE ROLE AND SIGNIFICANCE OF BEING A SENIOR LENDER

    Being senior in a property’s capital structure is especially important when there are changes in the amount of income a property generates or property values. After a property’s operating expenses are paid (i.e., taxes, insurance, maintenance), commercial real estate debt investors are the next to be paid from rental income. Excess income then flows to the property owner.

In summary, as previously noted, CRED stands out as a potential all-weather component in a diversified investment portfolio, and the argument for allocating in the current environment is particularly compelling.

This is underscored by the ongoing structural changes within the space, favoring non-bank lenders over traditional banks. From a pure investment standpoint, it's crucial to highlight the following:

  • High and sustainable coupon income

  • Downside protection

  • More favorable deal structuring terms

  • Portfolio diversification

The Case for CRED

At Valvest, we present attractive risk-adjusted returns coupled with a robust downside protection of low Loan-to-Value (LTV) and a low volatility. Consequently, we highly recommend considering our investment solutions as an alternative to conventional instruments, providing a stable source of interest income in lieu of traditional fixed-income investments. Beyond the appealing yields, the diversification potential offered by senior mortgages adds a noteworthy dimension to a conventional investment portfolio.

Investor Considerations: Investors should consider key risks of investing in commercial real estate debt. Commercial mortgage loans are typically illiquid and do not have an active secondary market. In addition, while commercial loans are typically secured by a first-priority mortgage on commercial real estate properties, they are still subject to the risk of default by the borrower. There is no assurance that commercial real estate investments will provide regular, stable distributions.

This content serves as educational material and does not serve as a financial promotion, investment counsel, or encouragement to engage in any specific product, offer, or investment. Valvest is not endorsing or suggesting any particular investment strategy or security. The expressed viewpoints and opinions within this content solely belong to the author and may not necessarily represent Valvest Investments' viewpoints or opinions. These opinions are subject to change without prior notice. It's advisable to acquire up-to-date information and conduct thorough research before partaking in any investment. Valvest does not provide legal or tax advice, and the information provided herein should not be considered as such. Tax laws are intricate and can significantly affect investment outcomes. Valvest cannot ensure the accuracy, completeness, or timeliness of the information provided herein and disclaims any liability associated with its use or any tax-related decisions made based on it.

Forecasts and estimates included in this content are based on certain assumptions deemed reasonable by the author. However, projections inherently involve speculation, and it's likely that some or all of these assumptions may not come to fruition or may substantially differ from actual results. The inclusion of projections in this content does not assure the reliability, accuracy, or completeness of the information herein, and neither Valvest nor the author are obligated to update or maintain the information provided herein.

All forms of investing involve risks, including potential loss of invested capital.