Pramerica mulling launch of new debt fund ‘every year’

Pramerica Real Estate is mulling the launch of a new debt fund every year, spurred on by strong investor demand, Andrew Radkiewicz, co-head of Europe at Pramerica Real Estate Investors in London, told PropertyEU.

‘If the opportunities present themselves, we could raise a debt fund every year. We launched our fourth debt fund and its predecessor to take advantage of opportunities in the market,’ he said.

Pramerica Real Estate - the European arm of the real estate investment and advisory business of US-based Prudential Financial - announced earlier this month that it had successfully completed the closing of its fourth European debt vehicle, Pramerica Real Estate Capital IV, having raised €820 mln of new equity.

Since the end of July, the fund has underwritten over €275 mln in junior debt investments, mainly in the office and residential sectors, Radkiewicz said: ‘We plan to invest around €200 mln every six months, so about €400 mln next year. We’re not geared at the fund level, so we have a maximum of €820 mln to invest,’ he added.

The value-added fund will provide junior debt for both acquisitions and refinancing of assets with good underlying property fundamentals, but for which traditional senior and other lenders are unable or unwilling to provide full financing. ‘The investment strategy is based on strong underlying real estate fundamentals, which gives the flexibility to invest in stabilised properties, as well as opportunities with asset management potential, targeting a range of returns between 13% and 17% IRR, through a mix of coupon and capital upside participation,’ said Andrew Macland, head of the UK and Ireland at Pramerica. ‘This flexibility stems from our primary origination approach, which means that we source, structure, execute and manage all investments ourselves.’

Pramerica’s latest debt fund focuses on office, retail, industrial and residential properties in the UK and Germany with deals ranging from €10 mln to over €100 mln, broadly split between the two markets. However, Pramerica has the option of underwriting even bigger loans, Macland said: ‘While we will typically underwrite loans of up to €100 mln, we have the option of going higher, should our investors want to. We’re opportunity-led rather than city-led and obviously differentiate between the different asset classes, such as offices and retail. The fund will focus on the UK and Germany, as they are the deepest and most liquid markets in Europe, with a proven demand for junior debt and preferred capital.’

There are 11 investors in Pramerica Real Estate Capital IV, including Dutch pension fund APG and Pramerica as well as institutional investors from the UK, Switzerland, the US, Asia and the Middle East. There was very strong interest from the US, according to Radkiewicz.

Since the launch of its first debt fund in 2010, the PRECap platform has completed 30 debt investments, comprising more than €1 bn secured on European real estate valued at more than €4 bn, predominantly in the UK and Germany. In April this year, Pramerica announced that it had raised €520 mln for its PRECap III fund. To date, Pramerica has raised €2 bn for its debt funds from institutional investors in Europe, North America and the Middle East.

There has been a boom this year in the number of debt funds being raised in Europe, particularly in the UK and Germany, helping to propel both countries towards a real estate lending surplus. Germany’s surplus real estate funding gap is projected to be around €1.58 bn by the end of 2014, compared to around € 9.11 bn in the UK, according to DTZ. Moreover, there will be around €130 bn of new lending capacity from non-bank lenders between 2013 and 2015 across Europe, according to DTZ. The new lending capacity is expected to come from nearly 70 different funds and insurance companies, including AEW UK and UK insurer Aviva’s Aviva Core Senior Fund. Subsequently, non-bank lenders’ share of the market is projected to grow to 15% in the UK and 7% in Europe over the next three years, according to DTZ.

And as more lenders enter the fray – including debt funds and investment banks – margins are being squeezed. According to Jörg Schürmann, head of corporate finance at JLL in Frankfurt, margins have fallen to as low as 100 bps for top residential assets in Germany or 150 bps for prime offices. Lenders, including debt funds, are moving up the risk curve to find new business, so many, like Pramerica, will now consider value-added properties, including secondary assets.

Prudential Financial, Inc. is headquartered in the US and has a global real estate debt platform of more than $53 bn.