European debt funds raise half of EUR 10b target: INREV

Investors have expressed increased interest in European real estate debt funds, with a majority citing the risk/return characteristics of real estate debt funds as one of the main attractions, according to INREV's recent Debt Fund Survey.

The survey suggests that a lack of certainty around the lending capability of banks and a growing funding gap have created 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.

In the last three years at least 19 European real estate debt funds have been launched with an estimated target size of EUR 9-10 bn but only 50% of this target has been raised to date. 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.

'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, Gothaer Asset Management.

Investors’ primary concern about debt funds is the lack of fund managers’ track record. '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,' said Vitaliy Tonenchuk, Senior Research and Database Manager, INREV.

Given the lack of senior lenders in the market, mezzanine strategies have 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 4-6%, which are too low for real estate investors who prefer subordinated debt funds with target gross returns of between 8-15%. The survey reveals that playing it safe remains 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.

'There is a great opportunity here for investors and fund managers to align their interests and activities as the real estate debt funds market is still very flexible. Our study reveals that transparency and education are key as everybody is eager to understand the market in more detail and to benefit from it,' added Tonenchuk.