Nordea Life & Pension in Denmark is investing DKK500m (€67m) in real estate financing through a fund it launched alongside other investors.
The fund aims to raise DKK2bn of capital from Danish and other European institutional investors.
Nordea Life & Pension was one of the lead investors in the fund, Kinnerton Opportunistic Credit C, alongside the Danish investment adviser and the UK firm Kinnerton Credit Management, which expects to take over management of the fund subject to regulatory approval.
Jens Bisgaard-Frantzen, chief executive at Kinnerton Credit Management, told IPE the fund had already raised DKK570m of its intended total of DKK2bn, and that pension funds made up the bulk of investors so far.
“Investments are focused on Denmark, and our ambition with future vehicles is to expand them over time to the Nordics,” he said.
The fund was set up to offer loan financing to real estate construction projects, providing an alternative to bank financing, Bisgaard-Frantzen said.
It is focusing on smaller projects, typically providing loans of between DKK20m and DKK100m.
“We lend the money via a special purpose vehicle (SPV), where the property and the liquidity are ringfenced, so we are in total control of all liquidity going in and out of the SPV,” he said.
The loans are meant to provide up to 90% of the cost of a project, he said, which equates to a 75-80% loan-to-value ratio.
The return on these loans is 12-13% a year, Bisgaard-Frantzen said.
Although the risk of this type of lending is arguably high, Bisgaard-Frantzen said that, in practice, this was lowered by close monitoring of the lending, as well as the fund’s ability to get involved in projects should anything go wrong.
“Because we are very close to these projects, we feel we are in control – also because of the fact we release the loans in tranches,” he said.
“In the event of a default, we can go in and take control of the project, so we feel really confident our losses will be very limited if there are any at all.”
Bisgaard-Frantzen has two ideas to expand the investments offered by Kinnerton, which received authorisation as an alternative investment fund manager in March 2016.
The first of these is to expand into other Nordic countries providing property development loans, and the second is to provide second-lien commercial mortgages, typically at 50-85% loan-to-value at rates of between 8% and 9.5%, mainly to existing property owners.
“The whole rationale is that, once Basel 3 is implemented, several of these loans will be unprofitable for banks to have on their balance sheet,” he said.
He said interest from institutional investors in these types of fixed income investments was beginning to pick up particularly strongly right now.
“With the current interest rate level, it is providing an alternative, and if you look at where we are in the credit cycle, we are convinced the level of defaults are acceptable if you are cautious or conservative in your underwriting,” he said.
“Also, because of regulation, banks are unable to take on the projects the way pension funds and other investors can.”