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2020-10-27 15:38 CET, Germany | Press release

React News: Catella discusses Europe’s resi market, €1bn fund target & UK plans

CER III plans to increase its portfolio from currently €260m to €400m by year-end.

Swedish group Catella launched its first European residential fund in 2007, with a volume of more than €1bn, and its first dedicated European student housing fund in 2013.
Founded in July 2017, Berlin-based Catella Residential Investment Management is a subsidiary of Catella. Under the leadership of Xavier Jongen, Michael Keune and Michael Fink,the firm manages and advises several funds and mandates,with AuM of more than €4bn across 10 European countries.

The open-ended CER III fund was set up in March 2019 . It has acore, core-plus strategy and a target return IRR of 5%-6% a year.

Speaking with React News, CER III fund manager Patrick au Yeung gives an update on fundraising and explains how institutional investors are broadening their residential strategies.

How much have you raised on behalf of CER III, your latest European residential fund?
The fund currently has €290m in equity commitments from six institutional investors from Germany, France and the Netherlands. More than two-thirds of the equity was raised during the Covid-19 pandemic, illustrating the confidence investors have in Catella’s residential track record and platform and the residential asset class in general.
Besides Western-European investors, we also saw strong interest from the Nordic countries, Switzerland, Italy and Canada. A group of investors are in the final stages of performing due diligence on the fund, and we expect that commitments will be almost double by the end of this year.

What does the fund’s pipeline look like and which cities are you targeting?
The countries targeted in the investment strategy include the core countries of Europe (Benelux, Germany, France, Nordics and Austria) as well as satellite countries like Spain and the UK, when this is opportune. The strategy is to invest in gateway capital cities as well as provincial cities, due to the lower risk profile of assets that meet affordability and regulatory criteria and provide robust rents. Our acquisition teams across Europe are working on a large number of deals, which will generate significant investment opportunities for our deal pipeline in the core European countries.

We are working on deals in Austria, France, Denmark, Germany and the Benelux – the jurisdictions where the fund already has an established presence thanks to our local network of partners and advisors.

What is the current investment volume and how much are you targeting?
The fund currently has €260m of assets in the portfolio or acquisitions to be closed before the year end. We expect that the fund’s portfolio will grow to around €400m by then. Our target is €1bn over three years.

In how many countries is the fund active and which other countries are you eyeing?The fund is invested in six countries – the Netherlands, Belgium, Germany, France, Denmark and Austria – and has deals in the pipeline to expand further in these jurisdictions.When opportune, the fund will expand its portfolio to countries like Finland, Spain and the UK as well, where Catella is already active with other residential funds and strategies.

Are pension funds increasingly turning to the residential market?
Larger European pension funds directly investing in real estate usually favour domestic residential assets in their segregated portfolios, due to the stable income and long-term resilience of this asset class. Strong allocations to their home markets is prompting an increasing number of pension funds to seek international exposure and to allocate funds to external fund managers.

By investing indirectly in pan-European residential funds, like CER III, pension funds can get efficient exposure to a diversified portfolio across multiple jurisdictions, by leveraging on the expertise and track record of experienced managers like Catella Residential. Furthermore, investors are increasingly interested in sustainable investments as part of the broader demand to make a positive environmental and social impact in addition to generating a robust financial return. Catella Residential is contributing to this global trend through it spartnership with Elithis, which will lead to over 100 energy-positive residential towers built across Europe. 

What are you are hearing from institutional investors at the moment?
Clearly fundraising has been affected by Covid-19 due to travel restrictions, but also due to different risk assessments by institutional clients. Some are currently focusing more on value-add strategies, but we continue to see strong demand for our stable cashflow-producing core strategies. There silience of this asset class is attracting many prospects. All of our European institutional clients are diversifying their existing local residential strategies and broadening them to Europe.

Have you adjusted your residential strategy because of Covid? Have you turned more cautious on some sub-segments or markets?
The investment strategy of our fund has held up very well during the pandemic. The fund has a core strategy with a focuson affordable housing in the core European countries. This mid-range rental segment of the market provides more robustrental income than the higher luxury segments.

Furthermore, instead of just targeting gateway cities where volatility and correlations are higher, we also make allocations to provincial cities, which offer good diversification potential. Our bottom-up fragility risk management monitor and in-house research capacities support us in the acquisition process. With respect to sub-markets in our strategic allocation, we are more cautious about serviced apartments, due to restrictions in travelling and traditional forms of co-living spaces. On the other hand, senior housing provides good investment fundamentals due to the ageing population and we expect to see more opportunities emerging here.

Are you working on new vehicles? What will they focus on?
Catella Residential has a long standing track record in European residential. With 10 funds and segregated mandates and over €4bn of AuM, we aim to leverage this track record by launching new vehicles in the next 6-12 months, expanding our existing fund range in a logical manner. We continue to develop strategies based on our integrated anti-fragility research and affordable housing, for example via our joint venture initiative with Elithis to build energy-positive buildings.

Additionally, we are expanding our presence in senior housing where we have already built up a track record with investments of close to €300m within our existing funds. These submarkets are underserved and also need new design concepts.

How will the appointment of Simon Günkel help grow your relationships with insurance firms and pension funds?
Simon has worked for different institutional investment managers and brings a strong sales network and expertise,which is helping within our consultancy sales approach to onboard pension funds and insurance companies.

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