Patrizia uses interest rate caps for first time in PanEuropean fund

Patrizia senior portfolio manager Falvio Casero said the tool was a primary reason for the firm’s ability to close deals this year.

Augsburg, Germany-headquartered Patrizia has for the first time employed interest rate caps to pursue deals using its flagship open-ended fund, Patrizia PanEuropean Property Limited Partnership.

Flavio Casero, Patrizia managing director, continues to look for opportunities to expand its flagship European fund.

The manager has been very active this year, deploying over €330 million in the last 12 months, including the acquisition of a student accommodation portfolio in Barcelona. The most recent transaction was a purchase and sale leaseback of a three-property French logistics portfolio in September for an undisclosed amount.

The primary reason for Patrizia’s ability to close the deals this year was interest rate caps. The firm would put the caps in place at the time of signing the deal, Flavio Casero, senior portfolio manager, told PERE. Patrizia began using interest rate caps in this fund for the first time this year, having previously used fixed rate date or interest swaps.

The volatility in the market meant Patrizia wanted visibility around pricing up front. “The financing had to make sense,” Casero said. “From a cost of debt point of view, it’s safely taken care of at signing.” Patrizia acknowledged the price of the caps can be high but that they were a useful tool in de-risking some of the deals.

The recent dealflow has allowed the fund to reach the €1 billion mark in gross asset value, the first time it has crossed that threshold in the fund’s second act.

The German manager relaunched the open-end fund in 2014 as part of a pivot to help the firm target what it considered to be more relevant property types. The firm restructured the fund, keeping only assets in core Western European markets. The fund was relaunched at approximately half the asset value it is today.

The fund’s restoration to scale has been facilitated by the firm’s fundraising activities during the pandemic. Patrizia has raised over €320 million of equity over that period of time, including €220 million in 2020, according to a press release at the time.

PanEuropean’s sector makeup

The current makeup of the fund is primarily focused on logistics and residential, or what Patrizia calls ‘living,’ as it includes student and senior housing. Over 40 percent of the fund is in logistics, primarily urban, Casero said, and almost 23 percent in living. The firm also has around a 20 percent exposure to office in the fund but has been reducing that in recent years due to eroding market conditions. Similarly, the firm has now reduced its retail exposure to under 10 percent of the fund.

Investment in logistics and living is likely to continue, Casero said, adding that Patrizia has a preference for student housing within living. The firm has not invested in alternative sectors to date but did expand the purview of the vehicle to include them around two years ago. The most likely candidates for investment are self-storage and data centers, Casero said.

“It built in additional optionality,” he said of the expansion. “We just haven’t found the right opportunity yet.”

In terms of markets, the firm has a “healthy” exposure to Spain. Almost a quarter of the fund is in Spain, which will continue to be the top destination for Patrizia, Casero said. Over 20 percent of the fund is in Germany and the Netherlands, with the firm targeting the former for potential expansion given the country’s particularly attractive logistics market.

One final area of future investment could be via development. The fund has a sleeve with equity that can be used for development projects. Such projects include both speculative development as well as heavy refurbishments. Casero added that the development projects in the core fund are de-risked via protections and buffers that reduce some of the cost.