Fast reading
- For real estate debt investors tracking the market is as good as impossible – because there is no benchmark. Loans are not valued (marked-to-market) either so there is no measurable volatility in investment values over time. The lack of liquidity for loans means that they are held on the books at par, unless impaired.
- Where there is no observable market return there is no way to determine whether diversification has been achieved. The objective of diversification for private credit portfolios is therefore focused on reducing ‘specific risk’, without aiming to track an elusive market return.
- But the principle that diversification reduces the impact of ‘specific risk’ still holds. All your eggs should not be put in the same basket. But how many baskets you choose to use depends on a trade-off between costs and benefits. The higher the ‘specific risk’ of an investment, the greater the risk that the investment’s performance may deviate from its anticipated path, but also the greater the potential benefit from diversifying a portfolio of such investments.
For further insights into European Real Estate Debt, please click here
FHL Real Estate Debt paper on portfolio composition
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