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BNP Paribas Real Estate Investment Management believes it is time to give debt funds a try.

Last week, the French real estate manager made its first foray into the German debt fund space, following its acquisition of iii-investments’ German fund business for an undisclosed sum.

‘The debt funds were one of the reasons we were interested in iii,’ Henri Faure, deputy chief executive of BNP Paribas Real Estate and member of the executive board, responsible for investment management, told PropertyEU. ‘It is time to give debt funds a try! We would like to develop this side of the business further, also elsewhere in Europe. At the moment, it is our first foray into the European debt arena.’

Most of the investors in the two debt funds are insurance companies and pension funds, according to iii-investments. Both funds are investing in debt, whereby the mortgaged property is primarily in Germany, as well as in the euro zone. In addition, both debt funds invest mainly in low-risk loans, although some medium risks can be incorporated to optimise the return. Typical loan sizes are between €10mln and €40 mln. Interestingly, iii-investments only acquired its first debt for the funds back in June this year. The loan was made against a residential portfolio in North Rhine Westphalia.

BNP Paribas is especially interested in investing in Germany, France and the UK, Faure said: ‘We are targeting Germany because it’s Europe’s largest economy and we see a lot of potential there, based on growth forecasts. We are interested in the ‘Big 6’ but also in regional cities. Earlier this year, we bought our German competitor Imoplan, which specializes in property management, in order to grow our presence in Germany. In Germany, we’re looking for core and core plus assets - offices, retail and logistics.’

In addition to the two debt funds, the French real estate manager also acquired an additional 11 funds from iii-investments, Faure said. BNP Paribas already manages 25 funds in its home market, including a dedicated healthcare fund. It is now keen to grow its presence in the UK. ‘The UK is now one of our main targets. As iii is already active there, our ambition is to grow the business in the UK with them,’ Faure said.

The acquisition of iii-investments ties in with BNP Paribas Real Estate’s plan to grow its business in Germany, the UK and France which, combined, account for more than 80% of European real estate investment. For BNP Paribas, the acquisition of iii-investments made perfect sense as it gives them access to new clients - German institutionals.

iii-investments, which is a subsidiary of HypoVereinsbank in the UniCredit Group, manages €4.2bn of third-party real estate and debt assets for German institutional investors, including pension funds, retirement plans and insurance companies, mainly based in Germany. Most of the assets are offices located in Germany, although there are also some properties in France, the UK and Japan. (Assuming the deal is approved by regulators, it is set to close by the end of the fourth-quarter 2013 at the latest).

However, the sale of iii-investments’ German fund business came as a surprise to some analysts. ‘It was quite surprising; iii rather seems to be a shrinking business,’ said the analyst who asked not to be identified.

Debt funds have been gaining momentum this year as a variety of non-bank lenders, including insurers, enter a space that is no longer the sole preserve of banks. As the economic outlook starts to improve in core European markets, notably Germany and the UK, interest in debt funds has rocketed. Indeed, there are currently 30 such funds hoping to raise around €12.5 bn, according to C&W. This is up from 15 funds in the first half of last year, according to C&W. However, the likelihood of all these funds reaching a close is unlikely, given the competition.
The ball got rolling last year as alternative lenders sought to diversify and also to plug the lending gap left by many banks. According to Preqin, $8.7bn (€6.6bn) of capital was raised by 34 European real estate funds in 2012.

Following its acquisition of iii, BNP Paribas now has €18 bn of AUM, of which €6 bn is in France, €4.6 bn in Italy, €4.2 bn in Germany, with an additional €3.2 bn in markets such as the UK and the Netherlands.