Abrdn, the UK investment manager, is targeting £1 billion (€1.2 billion) in institutional capital commitments for its latest real estate credit strategy, the evergreen Commercial Real Estate Debt fund II, which it has officially launched following a £205 million first close.
Through the semi-open-ended fund, the company aims to invest in a portfolio of predominantly senior investment-grade real estate debt assets in the UK.
In July 2021, Real Estate Capital Europe reported that the company was in the planning stages of the fund, for which it plans to target a fund-level return of between 4 percent and 6 percent, and through which it will offer loan sponsors a margin discount if they make sustainability improvements to their assets.
Speaking to Real Estate Capital Europe this week, Martin Barnewell, investment director in abrdn’s commercial real estate debt division, said the team is looking to build on the success of CRED fund I as well as its multi-sector private credit funds and multiple segregated account mandates in a bid to tap into more of the region’s increasingly attractive debt opportunities.
“This is not a case of an investment manager tilting its strategy to meet the market opportunity,” Barnewell said. “We really believe that the market opportunity has fallen very much square in the fairway of where we’ve always operated, which is predominantly in the senior investment-grade lending space.”
The fund will have an average rating of BBB and is targeting spreads and illiquidity premia in the range of 375-575 basis points and 100-300 basis points, respectively.
CRED II will be managed by Barnewell and the firm’s head of commercial real estate debt, Neil Odom-Haslett.
Following the £205 million first close, the firm is anticipating several new client commitments ahead of an upcoming second close as it offers an ‘early bird’ discount until September 2022.
“A lot of our clients are from the pension fund community, and for them to take long-term investment horizons is increasingly challenging. They’re therefore increasingly attracted to shorter-duration investments,” said Barnewell. “They are attracted to this space because they will perhaps look at our investment asset class through the lens of public credit opportunities.”
In its fund launch announcement, abrdn said investors were also attracted to the opportunity to invest in commercial real estate debt as spreads reach 10-year highs due to the growing funding gap. It added that increased bank balance sheet provisions in anticipation of expected covid-19-related defaults have reduced traditional lenders’ ability to provide new financing.
Overall, the asset class can offer the potential for higher yields relative to public corporate bonds, shorter tenors compared to many other private credit products and high-quality security and robust covenants at the asset level, the company added.
“But our investors also have certain return requirements that they need to achieve for the benefits of their members, which is increasingly challenging in a low-return environment,” said Barnewell. “They sacrifice the liquidity that they would get in public corporate credit investment and are increasingly transitioning from public investment-grade credit into commercial real estate debt as an investment that can benefit these schemes by trapping a significant illiquidity premium.”
CRED II’s semi-open-ended structure provides flexibility for investors to adjust their exposure over time and offers potential liquidity options to defined benefit pension schemes that are considering buy-out.
“While, traditionally, private credit investments would have been structured as a 10-year closed-end fund, we have come up with an open-ended structure allowing investors to exit, which puts our clients at the heart of the decision making process and gives them a seat at the table and allows more investor flexibility,” Barnewell explained.
The team has also created a rating methodology to provide the equivalent of an external credit rating agency assessment for each loan deal.
“This is really important for pension funds and insurance clients as it allows them to understand the nature of the asset class, the risk and compare the returns available,” said Barnewell. “And as these pension schemes in particular become more mature, they will typically be heavily invested in public credit.”
The fund will take a sustainable approach to lending, using abrdn’s fixed income sustainability policy and proprietary real estate assessment tool. Margin discounts for sponsors which meet pre-agreed sustainability-focused key performance indicators will be a key component of the fund.
“The margin discount approach is where we will recognise clients which have materially improved the sustainability of the underlying secured assets with a margin reduction of between five and 10 basis points,” said Barnewell. “This recognises the reduction in our credit risk, rather than any sort of reward. It allows us to be part of the conversation about changing the landscape and improving the sustainability of real estate assets across the spectrum in the UK.”