Private real estate debt volume in Europe grows to €80 billion

Private real estate debt has emerged as a sought-after class among investors, delegates heard at Real Asset Media’s European Debt Finance & Investment briefing, which was held at the Corestate offices in Frankfurt yesterday and also online on the REALX.Global platform.

“Demand for this product is very strong,” said Martin Bassermann, chairman of the board, HFS Helvetic Financial Services. “There was a decline in 2020 due to Covid, but in 2021 the market has come back and the year will close on numbers comparable to pre-pandemic levels. Capital allocation potential remained high during Covid as financing demand was strong.”

Newly initiated funds have been growing at a rate of about 20 a year and total private real estate debt volume in Europe is currently estimated at €80 billion.

The reason for the sector’s growth is that traditional banks cannot cover the demand for financing, partly because of more stringent regulations and more restrictive policies in the credit approval processes of the banks.

Another reason is the sheer volume of real estate development happening. “One million residential units are needed in Germany’s top seven cities alone, so there is higher demand on one side and less banking availability on the other,” said Bassermann. “Traditional banks don’t cover the required capital demand so there are excellent opportunities to invest.”

Private debt a stable asset class

Investors have found that private debt is a stable asset class, with low volatility even in uncertain times, and that it generates good risk-adjusted returns.

Looking at the US market, which has a much longer history and broader data base, it emerges that commercial real estate debt delivers higher total returns.

Another comparison can be made between the German and US markets. In Germany 80% of the financing is still done by banks and 20% by private debt funds and instruments, while in the US it is the other way round and the majority of deals are done through private debt.

“The upshot is that there is a lot of growth potential in Germany and in Europe as a whole,” said Johannes Märklin, member of the management board, Corestate Capital Group. “Banks will only take a small part of the volume of financing requests, so other sources of funds are needed and will continue to increase”.

There is a significant potential for growth as a market of €80 billion in Europe is still small.

“Of the €80 billion I guess around €20 billion are in the UK and €60 billion in Continental Europe,” said Assem El Alami, head of international real estate finance, Berlin Hyp. “To put that figure in context, it is equivalent to two loan books of a bank like ours.”