Report: investors put debt funds on their wish list

In the last three years at least 19 European real estate debt funds have been launched with an estimated target size of up to €10bn, says INREV.

Investors are expressing increased interest in European debt funds, according to a report by the European Association for Investors in Non-listed Real Estate vehicles (INREV).

The association’s Debt Fund Survey concluded that the majority of investors are citing risk,return characteristics of real estate debt funds as one of the main attractions.

This is the latest indicator of Europe now becoming the centre of attention for alternative providers of real estate finance following a rash of reports of US and European-based companies bringing forward products, and in some cases, launching follow-on vehicles.

Respondents to INREV’s survey highlighted lack of certainty around the lending capability of banks and a growing funding gap as two factors creating opportunities for other players to enter the commercial real estate lending market, fuelling investor interest in debt funds as a viable, addition to their existing real estate investment portfolios.

“Debt funds help us to diversify and spread risk across our total investment portfolio and because we entered the market early, we now have a clearer view of its potential,” said Ingo Bofinger, head of real estate at Germany’s Gothaer Asset Management.

In the last three years at least 19 European real estate debt funds have been launched with an estimated target size of €9 to €10 billion but only 50 percent of this target has been raised to date, said INREV. Part of this capital has come from internal sources, with many of the debt funds being set up by fund managers that are owned by large institutional investors who are prepared to invest the required seed capital. Smaller, independent fund managers find it more challenging to raise capital and close funds, the organisation added.

Vitaliy Tonenchuk, a senior research manager at INREV, said: “Although there is a limited history around debt fund activity, fund managers should still try and disclose as much as they can on past deals to reassure investors they are capable of running debt funds. There is a clear need to demonstrate a dependable track record.”

The study said there had been a lack of senior lenders in the market, meaning that mezzanine strategies had been harder than expected to get off the ground. As a result, real estate debt funds that are currently being launched are adopting a broader mix of strategies, including senior, whole loans and broader subordinated strategies.

Senior debt funds target fixed income investors and offer typical gross returns of 4 to 6 percent, which are too low for real estate investors who prefer subordinated debt funds with target gross returns of between 8 to 15 percent.

The survey also suggested that “playing it safe” remainded the core strategy for the majority of debt funds. In general, funds focus on newly originated loans on high-quality real estate in key markets such as the UK, Germany, the Nordics, Netherlands and France.