Dislocated real estate debt markets pay off for Cheyne

Shamez Alibhai, of Cheyne Capital’s $940m real estate debt strategy says European real estate markets are the “last remaining dislocation” from the Lehman fall.

Immediately after the credit crisis, real estate-linked ­securities were a toxic alphabet soup, and nobody had appetite for them. Even the highest-rated mortgage backed securities collapsed.

Between January and July 2007 half of all downgrades of US residential asset-backed securities (ABS) took place.

But since the 2008-09 liquidity crunch, various opportunities have arisen in “reborn” markets.

They were emptied of unstable structures such as collateralised debt obligations (CDOs) and structured investment vehicles (SIVs).

Some were leveraged up to 50 times, their de-gearing magnified falls, and their disappearance is therefore generally welcome.

Market bid/ask spreads have normalised to about one or two points for senior bonds, and two to five for junior bonds.

A clean slate?

Shamez Alibhai, manager of Cheyne Capital’s $940m real estate debt investment strategy, says all this makes a repeat of 2008 unlikely.

“Before, the amount of leverage in the European market was extremely high and SIVs/CDOs were, by their nature, heavily levered investments,” he says.

“This market will perform differently in another sell-off [because] today the leveraged SIV market does not exist. There is not the leverage in the market, so you do not have such deleveraging. Also, ABS and commercial paper is much more simple.”

Stuart Fiertz, Cheyne’s co-founder, says: “Using too much leverage was found out in the crisis when some funds lost their financing.” Alibhai uses no leverage.
But markets are still to rise back to fair values.

This ­creates buying opportunities for the £95m, London-listed Real Estate Credit Investments (RECI) trust Alibhai runs. It has raised £23m in the past year to take ­advantage of opportunities.

Alibhai is committing two thirds of fresh investments to bonds backed by commercial real estate (CMBS) and one third in similar ­securities backed by residential mortgage-backed securities (RMBS).

“If you look at Europe’s real estate markets now, the most senior ­commercial bonds at 40% to 50% loan-to-value (LTV) offer strong ­relative value. But where you have to be more informed is looking in the mezzanine space, where not a lot of people look. You are looking at 65% to 80% LTV with attractive yields.”

Alibhai’s strategy overall made 22% last year, investors said. He adds: “European real estate ­markets are really the last remaining ­dislocation after Lehman. But it is not ­distressed. It is dislocated.”


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