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Corestate Capital, a Zurich-based real estate management firm, has raised EUR 486mln for its real estate private equity fund, Corestate German Residential Limited. Corestate is hoping to grow the fund - which invests directly and indirectly in German residential properties - to EUR 2bn, with 75% leverage. The fund will run until 2014 and has attracted a range of institutional investors, including ING Real Estate Select in the Netherlands, UK-based Morley Asset Management and Australia's Goodman Group. It will likely be fully invested by the end of the first quarter of next year.

'Germany's residential sector is attractively priced and we see good opportunities to buy a range of multi-family assets, including those providing a steady cash-flow, properties which we can manage more effectively to add value and those that we can sell to owner-occupiers or to private investors,' said Corestate Capital’s managing director Christian Schulte Eistrup.

The fund, which has an annual target return of 15%, will invest around EUR 600mln in German residential properties this year, ideally off-market 'to avoid often expensive bidding processes.' The fund is primarily targeting multi-family dwellings valued at between EUR 5mln and EUR 50mln across Germany. It has already invested EUR 1bn in multi-family properties in cities such as Wiesbaden, Leipzig and Düsseldorf.

For ING Real Estate Select, the fund represented a good opportunity to enter the German multi-family market, said Alexander van Riel, ING Real Estate's fund of funds' investment manager. In addition, the fund aims to drive returns by improving rental income from the acquired portfolios and pays a high distribution yield, which was attractive, he said.

Corestate's latest capital raise is indicative of growing confidence in the German market, which has not been as badly hit by the US subprime crisis as the UK. Also, German institutional investors, who have recovered from the fund valuation scandals of 2004-05, are starting to re-emerge as a force to be reckoned with. Armed with deep pockets - reducing the need to borrow heavily - they are now ploughing capital into a wide range of property, both in their home market and abroad.

According to Inrev, the European association for investors in non-listed real estate vehicles, German institutional investors are swiftly shifting billions of euros that was previously invested directly in real estate into non-listed property funds. The attraction is that such funds cut down on costs as investors don’t have to manage properties directly and also allow for a more diversified portfolio, said Inrev's chief executive Lisette van Doorn.

In addition, she says, German institutional investors are changing their strategy when it comes to indirect investment: 'In the past, they used to typically invest indirectly abroad but less so in their home market. Now, they want to operate more efficiently at home as well, so are starting to invest indirectly in property there, too.'

While the boom of the past two years has subsided, Germany remains on the radar of international fund managers because it still represents good value compared to many other European markets. Such interest provides German institutional investors with an incentive to sell direct holdings to further boost their coffers - and up their exposure to indirect investment, Van Doorn added.