Schroders focuses on alternatives to hit debut credit fund return target

Asset manager Schroders has focused on lending to alternative property sectors in the first crop of deals for its debut real estate fund, enabling it to hit its target return of 7-8 percent, PERE sister publication Real Estate Capital has reported.

Through the vehicle, which had a first close in May 2018 on £98 million ($129 million; €113 million), the asset manager has committed £70 million across five loans – mainly to alternative assets and properties subject to a business plan to reach stabilization.

Schroders is expecting to hold a second close of its property debt vehicle by the second quarter of the year, with the aim of raising an additional volume between £50 million and £80 million.

It is raising capital from clients of Schroder Real Estate Capital Partners, a specialist division managing around £3.8 billion of real estate assets on behalf of institutional investors – traditionally UK pension funds. In total, it is aiming to raise £200 million by final close.

“Our fund targets alternative sectors with an asset management aspect and these are exactly the type of assets we have lent against: student accommodation, care homes and self-storage,” Andrew MacDonald, Schroders’ head of real estate finance, told Real Estate Capital. “We have also lent against assets in more traditional sectors, such as retail and offices, but in the value-add space, with a view for expansion or a complete refurbishment and reletting.”

The asset manager is deploying capital in deals of up to 75 percent loan-to-value, with maturities ranging from two to five years. Ticket sizes are between £5 million to £35 million, a size-band which benefits from “less competition,” while loan terms are tailored according to the individual opportunities, according to MacDonald.

The fund’s strategy, with the ability to syndicate the senior debt and retain the mezzanine tranche, is focused on assets with strong real estate fundamentals and favors value-add transitional assets where Schroders has a track record through equity investments.

“Our experience in acquiring and managing assets across different real estate sectors gives us a competitive advantage in being able to underwrite the risk,” MacDonald said.

However, there is competition to lend against alternative asset classes, MacDonald noted. “We face competition for every loan, quite often coming from challenger banks or some of the other debt funds. This might be related to the fact that our loans are smaller in size.”

While there is competition in the alternative segment, the asset manager is still hitting its return target of 7-8 percent for its property debt fund, said fund manager Patrick Bone.

Bone argues that Schroders can lend on assets with an adequate risk profile in order to hit the strategy’s target return. For instance, the firm would consider lending against a fully vacant office building, but only if its real estate fundamentals “are right.”

“We are very keen to lend in parts of the market that are supported by long-term demographic trends, such as self-storage and care homes, and we are more cautious regarding sectors that are closely correlated with the wider economic cycle,” Bone said.