The European Secured Lending fund remains resilient to the macroeconomic environment across the Eurozone following the events of the past few weeks. Due to energy and food price increases caused by global supply chain disruptions, inflation in the Eurozone rose to 10% in September while the unemployment rate was 6.6% in August, down from 7.5% in the previous year. Labour constraints also led to pressure on wages and therefore inflation.
The ECB has increased rates from a low of minus 0.5% to positive 0.75%, with a further 0.75 percentage point increase expected in October. In May, the ECB published a study which concluded that residential real estate prices were on average 15% overvalued, relative to income, across the Eurozone. It was meant as a warning to bank lenders to stress their residential portfolios against the impact of rising rates.
The ESL Fund was launched in August 2021, when the current macroeconomic headwinds were already in motion, the mandate was therefore for the Fund to pursue a diversified strategy where the core remit of the fund is to back, on a 1st mortgage basis at conservative LTVs, professional sponsors implementing high value add/opportunistic real estate investment strategies for assets in locations with strong demographics and a pre-identified exit strategy. The fund is well diversified by both country and asset type, with 33% of the portfolio in Germany, 26% in Benelux, 11% in France, and 13% in the Nordics.
Regarding asset types, 28% of assets are residential, and 72% are commercial or mixed-use opportunities. 78% of the assets are income generating, and 71% of assets have a short or inflation-linked lease which acts as a hedge against inflation during inflationary periods. The remaining assets correspond to owner-occupied properties at very low Loan to Value Ratios (13-34%).
The Fund focuses on well-located, liquid assets with strong demographic drivers where sale of the asset is a realistic and realisable strategy after the value-add project has been realised. As a result of the Fund’s current low LTV, on average 58%, and value creation during the investment term, the Fund is confident that it will be repaid on a pre-identified sale (83% of the asset exit strategies) or refinancing (17%).
By having a diversified European focus, and selecting high-value add opportunities backed by experienced and professional investors with a strong track record, ESL continues to be able to be highly selective in the opportunities it backs, using secure investment strategies such as direct lending and bridge lending solutions.
The fund is deploying capital at a run-rate of USD 7.5m per month in Q2 and Q3 of 2022 of which over 3/4ths are non-brokered, directly sourced loans or loans to repeat clients, with loans backed by 172% Real Estate. Furthermore, all of the assets within ESL are pursuing high value-add strategies – refurbishment, enhanced planning, operational improvements – with 86% in thematic ESG sectors which have secular positive demand drivers, uncorrelated to the macro-environment.
Disclaimer: The Katch Funds are solely reserved to professional and qualified investors as per MiFid II. Past performance should not in any circumstances be taken as an indication of future performance. The value of the money invested in the fund can increase or decrease, as a result of currency fluctuation and there is no guarantee that all of your invested capital can be redeemed. Investors and prospective investors should refer to the official documents of the Fund, including the Private Placement Memorandum, for further information about the risk of investing in this investment fund.
