Schroders turns to property debt

The asset manager is aiming to deploy £200m of capital through a UK-focused debt fund.

Schroders has joined the real estate debt fray with the launch of a fund targeting real estate assets across the UK which face debt liquidity limitations.

The asset manager has held a first close of its debut £200 million (€226 million) vehicle, attracting £98 million from clients of Schroder Real Estate Capital Partners, a specialist division managing around £3.8 billion of real estate assets on behalf of institutional investors – traditionally UK pension funds.

In its first foray into the property lending space, the firm has teamed up with London-based real estate debt manager Venn Partners, which will originate and manage the loans, while Schroders remains responsible for the fund.

“We are keen to create a niche strategy for our property debt fund, allowing us to access parts of the market that are underbanked,” said Andrew MacDonald, Schroders’ head of real estate finance.

Schroders is entering the real estate debt space at a time when rival asset managers including Amundi and BNP Paribas Asset Management are also raising capital through maiden debt funds to harness the growing investor interest in private real estate debt.

The asset manager, which is aiming to invest in various parts of the capital structure depending on market opportunities, said debt offers a defensive investment position in UK property investment at this point of the real estate cycle.

“We have looked at debt for a number of years and feel we have reached a point where capital values are looking fairly stretched, so we are looking at alternative ways to generate returns,” said fund manager Patrick Bone.

Through its new property debt vehicle, Schroders is targeting mid-single digit returns, Bone added, with a strategy favouring lending on assets less exposed to potential falls in property values and where income remains the main driver of returns.

The asset manager will deploy capital in deals of up to 75 percent loan-to-value, with maturities ranging from two to five years. Ticket sizes will usually be between £5 million and £25 million, while loan margins will be tailored according to the individual opportunities, Bone said.

Amid strong competition to source deals, MacDonald added that some funds with rigid lending parameters have found it harder to deploy capital. “It’s hard if you are going out just targeting senior debt and trying to compete with banks and insurers. That’s a competitive market,” he said.

“For these funds with set return parameters, this means they either need to go up the risk curve or change their return parameters. By contrast, our fund offers more adaptability. We can lend against the right opportunities at the right pricing and not being forced to lend against the wrong opportunities just to hit a certain target.”

The fund’s strategy, with the ability to syndicate the senior debt and retain the mezzanine tranche, will favour value-add transitional assets or alternative asset classes where Schroders has a track record through equity investments.

“Investing in areas like care homes or student accommodation is currently attractive, as demand drivers for these assets are less correlated with the economic cycle,” Bone said.

“As we move into a period where there’s Brexit uncertainty, these areas driven by investment themes such as demographics will to be more insulated to economic turbulence,” he added. “This is why we see interesting opportunities lending to alternatives, rather than focusing on the traditional sectors.”

Schroders, however, does not rule out lending against conventional property assets, if they fit with what the firm calls the ‘winning cities’ strategy, which targets locations benefitting from structural themes of urbanisation, changing demographics, technological innovation and strong infrastructure.

“We will be looking at opportunities to lend on office, retail and industrial assets, as long as they fit the criteria of being in a location that fits our winning city approach, where we can see sustainable occupier demand,” Bone said.

Schroders expects to deploy the capital raised in the first close within the next six months and is confident of reaching the target fund size of £200 million with the second close. Currently, the fund has a deal pipeline of around £40 million.