Pacific Investment Management Co (PIMCO), which has $2 trillion under management, is now targeting direct commercial property investments and non-securitized loans. The company says that now that banks worldwide are making a move to offload some of their debt, it is buying some of the unrated loans. Dan Ivascyn, a managing director at PIMCO, told Reuters that his company sees “considerable value” in this area.
The search for stable cash flow streams has turned into strong returns on several types of investments, which run the gamut from “junk” bonds to commercial mortgage-backed securities. Returns from higher-yield securities have decreased dramatically, and some money managers are considering a wider range of investment options.
Returns from triple-A rated U.S. commercial mortgage-backed securities have a current yield of 2.4 per cent. These investments are secured by loans on commercial properties.
In 2012, this type of investment would have provided a return of about 11 per cent, according to figures released by Angel Oak Capital. The Bank of America Merrill Lynch US High Yield Master II index, which is an index of U.S. junk bonds, had a return of 15.6 per cent in 2012, but is only up 2.7 per cent in 2013.
According to Ivascyn, commercial investors are better off putting their funds into direct investments by purchasing office buildings and malls or taking over loans that are either past due or could potentially go into default.
The company has recently invested in some European real estate. It bought five shopping centres in the United Kingdom for £95 million ($144 million) in December. The transaction was completed in partnership with NewRiver Retail, a UK real estate investment trust.
PIMCO is especially interested in European non-securitized bank loans, since debts accrued before the financial crisis will need to be restructured over the next few years. Ivascyn pointed out that there are a number of good loans “not being made” and that non-securitized bank paper in European countries offer much higher potential returns than securitized loans.
The company is actively seeking private loans from banks in the U.S. and Europe as well. Ivascyn points out that European banks currently have more debt on their balance sheets. Economic uncertainty still plagues the region, and new regulations being introduced to reduce debt will lead to fresh opportunities for PIMCO to buy loans over the next few years.
PIMCO believes the advantages of this strategy outweigh the risks. There are more opportunities in the private debt market than in the commercial mortgage-backed securities market at present. Some CMBS do offer fair value, according to Ivascyn.
“We think CMBS valuations are fair versus other credit sectors, ever so slightly attractive in a world where return expectations, I think, need to come down,” he said.
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