Real estate debt specialist BF.capital, a subsidiary of German lender BF.direkt, is set to launch its second German real estate debt fund this year, Real Estate Capital Europe can reveal.
The firm says it sees an opportunity to capitalise on favourable returns while taking less risk, and aims to corral €300 million of equity from institutional investors for a vehicle to do so. It is expected to be launched in the fourth quarter and have a hard-cap of €500 million.
BF.capital issued approximately €500 million of financings through its first vehicle – BF.capital Real Estate Debt Fund.
The firm has not settled on a return profile but expects performance to differ from its predecessor vintage as a result of hiking interest rates.
Manuel Köppel, chief executive officer at BF.capital, said: “The methodology will be different – not fixed-rate but EURIBOR plus margin as a benchmark. We will target a return of 300 basis points over EURIBOR for the vehicle.”
BF.capital launched the first fund in 2020 with the aim of raising €200 million from institutional investors. The firm closed the fund in Q4 last year after raising €227 million.
The firm also received a €300 million debt mandate from a German insurer in 2020.
“We see the upcoming real estate debt vintages as highly attractive because the potential return increases and the loan-to-value level that is needed to earn the target return has decreased,” he said.
He added he still expects the fundraising market to be challenged this year due to the denominator effect, where one part of an investment portfolio loses significant value and that impacts allocations for other parts. Such an impact often creates negative sentiment among investors, affecting future allocations.
This has been the case with office assets this year, where market participants have told Real Estate Capital Europe the negative noise around offices and legacy assets has hindered their ability to raise capital this year, as investors try to balance their portfolios.
“The market environment is challenging due to the denominator effect. Many investors are currently over-allocated in real estate and have now more alternatives,” he said.
“Furthermore, the re-pricing in the real estate market is still ongoing and there is little evidence for current valuations because there are not enough real estate transactions. As a result, many investors are reluctant to re-enter the real estate market and wait for more evidence regarding prices and multiples,” Köppel said.
However, he believes there is an opportunity for investors to invest in real estate debt if these institutions are willing to follow an “anticyclical” approach, whereby they look at the level of opportunity within the debt space separately to the equity investment cycle.
Through the fund, the firm will focus on providing stretched-senior and whole loans, with an ESG-component. The loans will be to project developers and other real estate investors to finance value-add activities in Germany. The average loan issued will be around €20 million in size.
Among loans BF.capital has issued in the past is a €40 million, 24-month, whole loan to German developer Centrum Group to support the development of its existing commercial real estate portfolio in Düsseldorf, in 2021.