German insurer targets €500m property debt portfolio

German mutual insurer Volkswohl-Bund has made its first foray into the real estate debt space and says it’s there to stay for the long term.

Volkswohl-Bund, which manages some €11 bn of assets, has awarded a €200 mln mandate to Dusseldorf-based debt specialist Caerus Debt Investments to invest in real estate-backed debt with high loan-to-value (LTV) ratios, or so-called 'whole loans'.

The commitment represents 2% of the group’s total assets and may well rise to 4-5% in the future, according to Axel-Rainer Hoffmann, CFO of Volkswohl-Bund.

Speaking to PropertyEU in an interview, Hoffmann said that real estate debt nicely complements the group’s overall investment strategy, which already includes mortgages (4%) and real estate (10%).

LOGICAL MOVE
‘Real estate debt both improves our risk returns and brings some diversification into our activities,’ Hoffmann said. ‘For us it was quite logical to enter the market at some point. We already have an in-house mortgage department which lends directly and we also have a real estate team in place. With interest rates at a record low, it was a good time to make this move. However,’ he added, ‘It is not easy to enter a new asset class especially in the case of fixed income-like investments such as real estate debt. This is why we are teaming up with Caerus, a market specialist.’

To avoid competition with the German banks – the market’s main financiers - Volkswohl-Bund and Caerus have set their sights on the main regional cities, which still provide a nice spread to risk-free interest rate returns. ‘We see a bit of an overheated market in the top-tier cities – which is where the German banks tend to place their focus, while the regional markets still offer quite a nice array of opportunities.’

While the group’s focus is currently on Germany, Hoffmann does not rule out investments outside of the country in the future. ‘We did not exclude other European markets in the mandate, but we will start with Germany,’ he added.

CONSERVATIVE STRATEGY
The company’s debt strategy will be conservative, focusing on stretched senior or senior debt with a loan to value of up to 80%. In terms of collateral, the group is prepared to lend against the more traditional commercial real estate asset classes – office and retail - as well as against more alternative products such as hospitality and logistics.

Hoffmann: ‘The advantage of debt compared to real estate is that [for an investment to be successful] you do not necessarily need to have strong capital appreciation. You need to select a safe debt proposal which generates a stable cash flow. Given that we are not prepared to take on mezzanine risk, we are playing a bit low on the return stack and we offer a cost-attractive proposition.’

Life insurers have been piling into the real estate debt market to boost income, even as rising demand reduces the extra yield they get paid to hold the debt. ‘At the moment we find ourselves in an unusually low interest rate environment, so we are in a position to accept lower than normal returns of around 4 %,’ Hoffmann said.

ATTRACTIVE LONG-TERM YIELDS
As a result of strong competition in the market, yields may go down slightly but they are expected to remain attractive in the medium term, he added. ‘Even if there is further pressure on returns, this strategy should remain attractive as the premium we are paid for the illiquidity and complexity of the transaction remains nicely above interest rates.’

Caerus has already deployed more than half of the €350 mln in equity commitments awarded by Volkswohl-Bund and another unnamed German insurer at the end of last year, according to Patrick Züchner, CIO and a shareholder of Caerus Debt Investments. ‘We are moving quickly with spending and we have a number of requests from other investors as well. Everybody is looking for returns with modest risk and real estate debt offers a very attractive risk return proposition compared to other asset classes.’

Commenting on the German market versus the UK or even France, Züchner said the market still offers a wide array of debt opportunities thanks to its less centralised structure.

‘German banks are very active but only in the prime segment of the market, where prime is defined in terms of the type of asset - office, retail and residential,' he noted. 'If you look at logistics or even hotels there is far less debt availability in the market. This is particularly true for B and C cities because the German banks concentrate on A locations and on assets which tick all the boxes.’

By Virna Asara
Finance Editor