Scope Ratings sees 2015 on track to be record-breaking for European real estate debt funds with the number of funds and target capital raising by mid-year 2015 already above the 2013 full-year record.
With 53 funds and an aggregate target capital of EUR 33.6bn as of June 2015, growth of European real estate debt funds has kept its momentum since late 2012. The positive market reception of real estate debt funds is also reflected in strong placement volumes for funds since 2011, with most vintages showing actual placement volumes exceeding target levels.
The two most prominent reasons for the strong demand are: institutional investors’ ongoing hunt for yield in a painfully low interest rate environment; and a favourable amendment in the regulatory framework for institutional investors in Europe. In particular, the currently strong demand for debt funds among German insurance companies and pension funds can be explained by changes in the German insurance supervision law (Versicherungsaufsichtsgesetz - VAG).
European real estate debt funds have gone from strength to strength over recent years with growth driven by both the asset and liability sides in funds. However, Scope predicts this to be a slowing trend. While demand for real estate debt funds is expected to remain high or even increase further, increased liquidity in Europe’s commercial real estate lending markets will intensify competition for assets, making it harder to source assets suitable for meeting investor’s risk-return profiles. To stay ahead of the curve, real estate debt fund managers need to demonstrate flexible and innovative lending strategies, as well as operational strength, to put available money to work efficiently.