UBS Global Asset Management is to launch a senior debt fund to invest in Europe targeting €500 million to €600 million of equity.
The fund will be a follow on to its UBS Participating Real Estate Mortgage Fund I (PREMF I), through which it invests only in the UK.
Despite dramatically reduced margins for European real estate lending over the past year, fund managers and investors are still seeing returns as being strong relative to bond and gilt rates.
UBS is aiming to have the fund ready to make its first investment a few months prior to June next year when PREMF I’s investment period ends.
Unlike PREMF I, the second fund will not take preferred equity stakes in deals but it will lend at loan-to-values of up to 75 percent.
It will look to invest primarily in countries where UBS has offices, namely France, Germany, Spain, Italy and the Netherlands. It is unlikely to invest in UBS’s home country of Switzerland due to the low margins on offer. It may look to structure the euro-denominated fund so it can invest in the UK.
The vehicle will be managed by managing director and head of global real estate – UK debt, Anthony Shayle, who also manages PREMF I.
He said: “We are returning to a period of normalized rates of return for debt funds in terms of risk and reward. Historically, over the past three or four years investors have had a feast in terms of returns but now that has gone away… debt has that cushion of equity behind you which protects you dramatically and investors are still attracted to that.”
It will lend against all real estate sectors and predominantly secondary or strong secondary property. Ticket sizes will be between €5 million and €30 million but UBS could consider writing larger cheques in order to deploy capital more quickly if the market continues to tighten.
PREMF I’s general partner, Japanese investor Mitsubishi Corporation, it is thought may invest in the fund.
PREMF I attracted £140 million in a first close in January last year and UBS is to hold a second close next week of £26 million. It expects to make a final larger close in June which will bring the fund to around £300 million, slightly short of its initial £350 million target.
Thus far it has deployed £102 million in around nine deals at LTVs of up to 80 percent. It is line to hit its target return of 8 percent - 9 percent.