New low-risk debt fund will look beyond ‘big six’ German cities, reports Alex Catalano
Deutsche Asset & Wealth Management’s senior debt fund is a new player in a very competitive league. Senior lenders are a dime a dozen on its home turf, Germany, and that domestic market is the fund’s “top priority”.
Closed with €500m in January and with more capital in the pipeline, the fund is squarely in the safe, conservative space: targeting loan-to-value ratios of 60%, on three- to 10-year terms, in the four main asset classes, and fixed or floating rate.
“It’s a pure senior debt fund, so in terms of risk profile and pricing, it’s very much in line with pfandbrief banks – low risk,” says Andrea Vanni, head of European real estate debt investments at Deutsche AWM, who joined from JP Morgan seven years ago. “It’s a market-taker in terms of margin.”
German senior debt margins are very low, as participants in Real Estate Capital’s Germany Forum recently bemoaned (see pp14-18). “You now see senior loans for offices in the top five cities at margins below 100bps – at 70-80bps,” says Vanni. “It’s not easy to find deals paying more than 150bps.”
The fund doesn’t originate, but acquires debt from other lenders. “Our ideal size is around €50m; if the financing is above €100m, we would do it in a club deal with other banks, since we need a diversified pool,” says Vanni.
“In Germany, we acquired a long-term residential loan: 10-year financing at 60% leverage.” He notes increasing borrower demand for fixed-rate finance. “The good thing about our fund is that we can do both fixed and floating-rate loans – and insurance company investors prefer fixed rate, so that is a nice match with investor demand.”
Meanwhile, Germany’s senior syndication market isn’t exactly hopping yet, with banks hanging onto their loans.
“The bulk of the market in Germany is €50m-60m assets, so when they make a €30m-40m loan they have no intention of syndicating that unless they absolutely have to,” says Vanni. “Our hope is that the market will become more like the US market, which is more active.”
Germany offers low volatility
So, aside from Germany being Deutsche AWM’s home turf, why focus on this market, when others might offer better risk/return opportunities? “Germany has the lowest volatility in Europe, so we find that investors moving into real estate loans for the first time are willing to sacrifice return for less risk,” says Vanni.
The fund’s investors are European insurance companies and Vanni expects them to move beyond this German comfort zone as they become more familiar with debt.
“We also have a pipeline in the UK, Italy and Spain. In the latter two, retail is our sweet spot, while offices would be limited to the top two or three cities in each country.” There’s been a bit less action in France, but Vanni is hoping to close a deal there soon.
One of the fund’s key features is that it is prepared to invest in Germany’s B and C cities, which “have a little better return and are actually even more stable than the top six”, Vanni says. “There, volatility is driven by international investors coming in and out of the market and they tend not to venture outside the top three or four cities.
“When you go to B and C cities, it is really German investors and this base has been very stable. Though lack of liquidity is a factor, in terms of rents, in the B and C cities you don’t see the big swings you might see in the top six cities when there is a crisis, and in certain markets we now see low vacancy levels and outperformance,” he adds.
Vanni also believes Deutsche AWM can score on speed of execution. “Because we have a strong asset management platform, it is very straightforward for us to underwrite assets, since it is likely that we either owned it in the past, bid on it or we were the manager. For example, the first loan we made was on a portfolio we used to own.”
Deutsche AWM also has a €500m mezzanine debt allocation, in a spezialfonds, which it set up early last year, after a change in legislation allowing insurance companies in pension funds to invest up to 30% in debt. “It’s an allocation within a much larger equity fund; we changed the bylaws of some of our equity funds to use that 30%,” says Vanni.
The bulk of the capital raised for mezzanine debt last year has gone into London and New York, but Vanni adds: “We’ve been looking at France, Italy and Spain. This year we’ll probably see more activity in those markets.”