PIMCO Targets European Commercial Property

Hunt for yield brings higher risk, potentially higher returns for bond shop

Direct investments in European real estate loans—are they crazy? Like a fox, apparently.

Reuters reports that the head of PIMCO's mortgage credit portfolio management team says the firm is targeting direct commercial real estate investments and nonsecuritized loans, which carry greater risk but higher return potential.

The news service notes that PIMCO’s Dan Ivascyn believes the move by banks around the world to offload some of their debt has created opportunity to buy up unrated loans.

"Some of the more complex, illiquid areas are where we still think there is considerable value," Ivascyn said.

The hunt for yield and stable cash-flow streams have translated into strong returns on everything from "junk" bonds to commercial mortgage-backed securities.

Returns from investments in commercial mortgage-backed securities and other higher-yield securities have come down significantly, pushing some money managers “farther afield.”

For example, Reuters cites AAA-rated U.S. commercial mortgage-backed securities, which are secured by loans on commercial properties and have a current yield that takes into account worst-case scenarios of about 2.4%, after returning 11% last year, according to data provided by Angel Oak Capital.

“Additionally, the Bank of America Merrill Lynch US High Yield Master II index—an index of U.S. junk bonds—had a return of 15.6% last year, but is up just 2.7% so far this year.”

Reuters concludes that Ivascyn sees opportunities in direct investments in commercial real estate such as malls or office buildings and nonperforming loans, or loans for which payments are past due or potentially in default.

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