Launch of first German debt fund as Spezialfonds

The Munich-based iii-investments has won a mandate from a German pension fund to set up a €200m debt vehicle, the first such vehicle in Germany to be established as a Spezialfonds. The Unicredit subsidiary did not name the institution, but said it expected to set up a second such fund as early as next year.

The fund manager had signalled its intentions to move into property debt investment earlier this summer, so the move is not altogether a surprise. Given the low returns on government bonds, more and more institutions are looking at alternatives that provide higher returns, and the German fund manager’s move echoes similar moves into debt markets elsewhere.

iii-investments recently released their own internal report showing how the funding gap that has opened up in the wake of the retreat of traditional bank lenders would lead to plently of opportunities for equity-rich investors, but also highlighted how the new debt funds would fall a long way short of plugging the whole funding gap.

According to the fund manager, the new debt fund will act "indirectly as lender" and participate in "bank loans" secured against real estate primarily in Germany but also in other euro-zone markets. It will target loans between €20m and €40m in size and only those that are euro-denominated. The fund will target "low-risk debt" for the most part, but iii-investments stated that it could incorporate "a few medium risks" to "optimise the return". This is targeted at 5%, considerably above the current returns on Pfandbriefe.

Reinhard Mattern, CEO of iii-investments, said of the new launch, “This commission enables us to issue the first special debt fund by a real estate capital investment company in compliance with the German Investment Act. The high demand shows that, with this new type of product, it was right to rely on the vehicle of a German special fund familiar to our German customers….We are also optimistic that in the near future we will be able to conclude the first closing of a second debt fund in the form of a pool fund, but targeted at more conservative investors, looking for returns more like 4.0-4.5%”

“As a real estate investment company, we possess the know-how not only to be able to analyse the make-up of the loans in detail on behalf of our customers but are also able to evaluate the properties that lie behind these loans in accordance with our criteria for investigating the purchase of real estate... Basically, we only purchase such loans on behalf of our customers as if we were ourselves investing in the property.”

iii-investments has somewhat of a pioneering reputation in the German open-ended fund community, but since shifting its focus to the institutional sector, is now the second-largest provider of German real estate Spezialfonds.

Meanwhile, a new survey of investor attitudes to real estate debt funds highlighted the sharp divide between German and Anglo-Saxon institutional investors, with the Germans being inherently more conservative and risk-averse, preferring to take a wait-and-see approach to what they see as still a very niche market.

The study, by Schroder Property’s research team, also brought into focus the much greater transparency and liquidity of the UK market, so that any growth in the growth in the German market is likely to be restricted to low-risk senior lending. In all, 122 investors responded to the Schroder survey, of whom 11% were already invested in debt funds, while 29% said they were considering making investments over the next 12 months.

Philipp Ellebracht, product manager for continental Europe at Schroder Property, said the results reflected the inherent conservatism of German institutional investors. “The real estate debt market remains to be in a very niche position," he said. "The overall level of activity is so small at the moment that people prefer to analyse the market rather than be a first mover.”

The survey of German pension funds, insurance companies, asset managers, funds of funds, family offices, cooperative and savings banks, and other institutions, found that 68% preferred senior debt, 23% junior or subordinated debt, and 10% were focused on mezzanine. The preference for low-risk debt investment extended to the risk profile of the underlying real estate: 76% of respondents wanted exposure to core or core-plus assets, 15% value-add and 10% opportunistic.

Ellebracht said that debt funds should therefore focus on low-risk, core assets and have an investment focus in line with what he termed the "bread and butter business" of traditional bank lenders. He added that there might be more appetite for higher-risk mezzanine strategies in the UK, but for Germany interest was likely to remain limited.