Peakside Capital, an international real estate investor, and KD Funds, one of the oldest asset managers in South East Europe (SEE), have made the maiden acquisition for Slovenia’s first regulated real estate Alternative Investment Fund.
KD Adriatic Value Fund has commitments from regional institutional investors and has a current buying power of more than €50 mln. The fund has acquired its first asset, the Tivoli Center in the Slovenian capital Ljubljana.
Tivoli Center
The Tivoli Center was purchased for €13 mln, reflecting a net initial yield well in excess of 8%. Located in downtown Ljubljana, the Class A property provides 8,000 m2 GLA across two connected buildings. Some 97% of the space is occupied by long-term tenants with strong covenants. Current tenants include international law firms, as well as a diversity of various successful SME companies.
Stefan Aumann, managing partner and founder of Peakside Capital: 'The acquisition of Tivoli Center is an excellent start for the Adriatic Value Fund. We are very happy to have acquired a prominent building that is in demand from occupiers and is located in a prime location within the growing Ljubljana office market. This is a stepping stone in establishing a larger portfolio in the region that will offer attractive returns to the fund's investors.'
Luka Podlogar, the president of the management board of KD Funds, said the fund and its first deal staked a claim by KD and Peakside to be 'pioneers of development in the real estate fund sector in Slovenia. 'By way of this venture, we are fulfilling the KD Funds' strategy in practice, namely to expand our product range of successfully managed funds for retail investors, by adding alternative investment funds for institutions,' he said.
The fund
KD Adriatic Value Fund, Special Investment Fund, is a seven-year alternative investment fund managed by KD Funds, with Peakside Capital acting as investment advisor. Its investment objective is to generate returns for investors from rental income and capital growth through investments in real estate in Slovenia, Croatia and Serbia, with a special focus on office and retail properties.
The three target countries represent a region with a relatively undeveloped real estate sector and attractive returns, whilst the long-term success of the fund is further supported by strong economic growth, according to Peakside and KD.
Peakside and KD plan to grow the fund to €50 mln within the next 3-4 months as there are two more properties in the immediate pipeline. This will give institutional investors a proof of concept and will form the basis for a second marketing push. The focus will be on local institutional investors; their counterparts in Germany and family offices.
KD Adriatic Value Fund will seek to acquire single assets or small portfolios over an 18 month to two-year investment period. The fund may invest selectively and opportunistically in logistics to benefit from Slovenia's location on the east-west and north-south distribution corridor. Croatia also lies close to the important transportation route. Podlogar said the fund may also invest opportunistically in the hospitality sector, something that could enhance the fund's returns.
'The sweet spot for individual investments will be in the €15-25 mln range, with a total of about 10 assets offering good diversification,' added Aumann.
Underdeveloped market
Based in Slovenia, KD Funds is one of the largest and largest asset managers in the SEE region. The firm manages about €800 mln, predominantly in equity fixed income and money market instruments.
'As the yields on fixed-income instruments were dropping continuously, we decided in 2015 to first start looking at real estate as something that can be investible for our clients,' Podlogar said.
Real estate as an asset class didn’t really exist in this region, he said. 'Some institutions tried investing into real estate, but it was all very direct and from their own balance sheets and always with a lot of problems. There wasn't any professional real estate asset management available here. In addition, there was also no investment vehicle suitable for pension funds and insurance companies seeking access to the real estate asset class.'
Peakside's attraction included that it was 'not a multi-billion dollar manager', rather a 'highly successful niche asset manager with experience in eastern Europe and based in Germany. 'The core CEE markets have gone through a real estate development cycle and have grown to a more professional level. This has not happened in SEE yet,' Podlogar said.
Yield gap
Aumann noted that SEE real estate offered a significant yield gap compared to the CEE markets and Western Europe. The few deals in the SEE region in the last two years have been mainly carried out by South African investors at relatively high yields. 'This creates an unique opportunity because on the one hand we had an underdeveloped market and local institutions who are hungry for real estate. On the other, property in the region can offer a yield gap of about 200 basis points, he said.
KD and Peakside
Founded in 1994, KD Funds is one of the largest and oldest asset managers in South East Europe. It manages around €800 mln in 34 funds and 13 investment mandates together with its subsidiaries) across the SEE region, including the oldest mutual funds in Slovenia and Croatia.
Peakside Capital was founded in 2010 as a spin-off from the Merrill Lynch investment bank and currently employs about 30 people. It is mainly active in Germany and Eastern European countries, managing funds and asset management mandates. It currently has more than €1 bn of gross assets under management.
