P
rivate credit has been a top choice for alternative investors over the past few years, particularly during periods of high interest rates. Corporate lending has delivered higher-than-expected returns due to rising corporate profit margins and valuations. However, with real estate market recovery underway, real estate debt is now poised to outperform other private credit strategies.

    According to Cyrus Korat, co-founding partner of DRC Savills Investment Management, real estate debt offers a compelling opportunity as property values stabilize. New loans secured against assets that have rebased lower in value give lenders a favorable position. Historically, real estate and corporate credit performance have been closely tied to the business cycle, but their correlation diverged during high interest rates.

    Real estate debt currently offers high returns with an improving credit profile compared to corporate credit, which faces rising defaults and stretched valuations. Korat's strategy is weighted towards residential and industrial/logistic sectors due to their longer-term outlook. He notes that retail and office sectors carry more risks but also present "mispriced" opportunities for capital providers.

    Korat believes the most compelling opportunity is providing senior whole loans, which can generate high returns with spreads of 4-5% over the risk-free rate. This compares favorably to mezzanine debt, offering a fractionally lower return for much lower risk.

    Corporate credit, while large and accessible, shows warning signs, including rising speculative grade default rates and stagnant new business formation in Europe. High valuations leave room for significant price corrections, Korat warns.

    Infrastructure debt remains attractive due to its resilience to economic cycles and defensive nature. Despite compressed pricing, it offers hard asset security and stable recovery rates through the lending cycle. Investors should closely monitor these trends when making portfolio decisions, keeping in mind that past performance is no guarantee of future results.