NORTH AMERICA – The Sacramento County Employees’ Retirement System has made its first real estate debt investment in Europe with a $50m (€37.1m) commitment into the DRC Capital European Real Estate Debt Fund II.
Scott Chan, CIO at the pension fund, said: "There is a huge supply/demand in balance for real estate debt in Europe.
"Over the next 3-5 years, there is $1trn of debt that will be coming due in that region.
"Around 60% of the banks that have been capital sources of this debt are no longer in the marketplace.”
The pension fund believes the investment strategy for fund is a way to achieve high returns on core properties through debt.
“The fund will eventually be able to get its hands on debt that is secured by core real estate," Chan said.
"This strategy will achieve unlevered IRRs in the range of 9% to 14%.
"This compares with using the same strategy in the US, where the unlevered IRRs would be in the range of 6-7%."
Chan said the real estate investment markets in Europe were "still a ways away" from where things were in the US.
“I would think Europe is currently 2-4 years behind where the market is now in the US,” he said.
The investments for the commingled fund will target a variety of countries.
“We expect the capital will be looking in the same areas as DRC Debt Fund I," Chan said.
"These included the UK, France, Germany and The Netherlands."
Sacramento County had the investment opportunity for Debt Fund II sourced to it by its two investment consultants, the Townsend Group and Cliffwater LLC.
The commitment into the fund is part of $101m of new real estate commitments to be made by the scheme.
One of these, approved recently, was a $35m commitment into the Prime Property Fund managed by Morgan Stanley Real Estate.
This is a core, open-ended, commingled fund that invests in office, industrial, retail and apartments in the US.
So far, $21m of the commitment by Sacramento County has been called by the manager.
The commingled fund has an entry queue, so the pension fund will have to wait before the remaining portfolio of its commitment is called.
The other commitment has not yet been approved.
This is a $16m allocation into a commingled fund that buys a mixture of retail and office assets in the US.
