German insurer Volkswohl-Bund is looking to secondary cities, following a decision to invest in commercial real estate debt for the first time.

Having recently mandated fund manager Caerus to invest €200m in senior real estate debt, the €11bn institution sees opportunity away from the core playground of Germany’s main cities.

The move into real estate debt is yet another example of institutional capital entering a traditionally bank-dominated sector.

Significant yield compression in core locations has pushed investors and lenders towards Germany’s ‘B-Städte’ in the search for opportunities.

“There is still demand for finance,” Axel Hoffmann, Volkswohl-Bund chief finance officer told IP Real Estate, pointing to banks’ reluctance to lend in “niche” sectors.

“There are market players who don’t have access to credit in certain markets – particularly in the mid-sized loan market and in the CRE loan market.”

Whole loans up to loan-to-value ratios of 80% are being offered through the mandate.

While Volkswohl-Bund’s focus is firmly fixed on domestic real estate, Hoffmann says the US offers a good example of how certain sectors are less crowded than others. “If you take project development for multifamily housing in the US, then it’s very hard to find credit for,” he says. “So in certain niches, there is demand.”

Entering a new asset class, the investor is “convinced”, he says, that commercial real estate debt “makes sense as part of a strategic asset allocation”.

“We have our mortgage department, we have a real estate department, so that helps,” Hoffmann says. “This sits in between. Low bond rates mean we are somewhat forced to go towards CRE debt.”

For Caerus, the latest backing follows a parallel €150m commitment from another, unnamed German insurer.

Last year, German insurer Gothaer backed Caerus’ Real Estate Debt Fund I with €50m. The fund also received a €20m commitment from Swiss private bank, Reichmuth & Co.

Along with junior and mezzanine loans, Caerus said it has been mandated with €420m for CRE debt, with investments worth €188m in place.

Fund I has a target volume of 
€300m and focuses on German-speaking countries but has not ruled out financing in the Benelux region.

Caerus chief investment officer, Patrick Züchner, said there is a pre-conception that German commercial real estate financing was liquid.

“This is not the case,” he said. “It’s a split market – there’s a core market where the banks are active but there’s a market beyond that.”

The office and retail sectors of Germany’s ‘B’ cities, Züchner added, have been “less volatile” than the prime side.

“In some cases – such as a mixed-use asset in a ‘B’ city – it is not even a case of pricing but more an issue of basic availability as some German banks have strict lending disciplines. You can find surprises.”