GERMANY – Real estate debt funds remain a "niche" investment for German institutional investors, and any growth is likely to be restricted to low-risk senior lending, according to a survey by Schroder Property.

Schroder Property's study of 122 investors found that 11% were already invested in debt funds, while 29% 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.

Schroder Property is still "in an analytical position" in regard to potentially launching real estate debt products. Earlier in the year, Duncan Owen, head of property funds in the UK, told IP Real Estate that the company was taking its time.

But Ellebracht did say it would be easier to launch a debt fund in the UK rather than Germany in the medium term because of the greater transparency and liquidity of the former.

Transparency in Germany could be boosted next year with the launch of a De Montfort-style lending survey initiated by Real Capital Analytics and to be carried out by the International Real Estate Business School (IREBS) at the University of Regensburg.

The project, which is also sponsored by DTZ, Jones Lang LaSalle, Savills and BulwinGesa, will analyse the commercial property lending market in Germany and will present its first findings at Expo Real in Munich in October 2013.

Bill Maxted, author of the annual UK Commercial Property Market Lending Report produced by De Montfort University, will support the project as a consultant.

“Our experience in the UK is that an in-depth study of lending by banks and other financial institutions to the commercial property investment and development industry has made a large contribution to the understanding of this nationally important and complex market," Maxted said.

Tobias Just, professor at IREBS, added: "We need a better understanding of our real estate debt markets, as debt financing can lead to severe real estate and macroeconomic cycles. So far, we only have very limited data on the maturity structure, the regional concentration or the asset focus of debt financing."

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