New German debt funds claim warm reception

We have reported in recent issues of REFIRE on the new debt funds being launched in Germany as an alternative source of real estate financing, with traditional lenders retreating from what were once their natural markets.

Faced with Basel III and upcoming EU regulations, several new vehicles projecting yields of 5% are emerging to appeal to insurance companies and occupational pension funds disillusioned with the paltry returns available on government bonds to meet their long-term obligations.

We recently reported on Munich-based iii-Investments, a wholly-owned subsidiary of Hypovereinsbank, which had accumulated €200m for its first debt fund within weeks, and has already launched a second vehicle. “The first closing of €100m for our second fund has also already been secured,” Reinhard Mattern, CEO of iii-Investments, said recently.

Deutsche Hypo, the real estate finance arm of Norddeutsche Landesbank, is also currently preparing its first debt fund with a volume of €500m. “We are seeing great interest from pension funds and smaller insurance companies for our vehicle,” said Andreas Pohl, member of the board at Hannover based Deutsche Hypo. Fondshaus Hamburg Immobilien (FHHI), a specialist for closed-ended real estate funds, has started two closed-ended debt funds with a volume of €30m each, targeting wealthy private investors. “The credit squeeze in the property sector offers opportunities not only for institutional money but also for private investors,” according to FHHI managing director Angelika Kunath.

In the UK and France, debt funds are already starting to play a role in property financing. In 2012, one of the largest players in the sector, AXA Real Estate Investment Managers, a wholly-owned subsidiary of French insurance giant AXA, accumulated €3.3bn for its debt funds from institutional investors, bringing the combined volume of its lending portfolio to a total of almost €7bn.

While AXA is eyeing lending opportunities across Europe, the new bank debt funds evolving from players such as iii-Investments and Deutsche Hypo in Germany are not a threat, according to Isabelle Scemama, Head of Corporate Real Estate Finance at AXA REIM. Demand for finance remains strong, she said: “The retreat of traditional senior lenders in the property market has accelerated further in 2012, making the supply/demand imbalance more acute.”

However, investors with LTVs above 60% like former German listed heavyweight IVG Immobilien may not profit from the debt funds in the near term. So far, these new vehicles only target loans with an LTV at or below 60% in order to minimise risk. “But to achieve their yield objectives in the long run, debt funds will have to take on higher risk”, claims Marcus Lemli, Head of European Investment at Savills.

That may well become the case once fund managers and institutional investors gain more experience with these new vehicles. In the US where debt funds were established more than a decade ago, financing is available for LTVs of up to 80%.