There is strong demand for European non-listed real estate debt strategies, delegates heard at Real Asset Media’s Debt Finance & Investment briefing, which took place recently at Norton Rose Fulbright’s offices in Frankfurt.
“Interest rates will normalise at a much higher level than we’ve been used to over the last 10 to 15 years and that means that debt strategies are becoming attractive for their risk return profile,” said Iryna Pylypchuk, director of research and market information, INREV.
In 2021 capital raised for European non-listed real estate was €12 billion, a record high. “I believe the numbers for 2022 are likely to go up further,” she said.
The ongoing structural shift to non-traditional lenders has been accelerated by current market conditions, servicing the financing gap left by banks.
“It’s a healthy development, as the lending market space should be diverse in terms of choice of lenders, it makes it more competitive,” Pylypchuk said.
The US remains the largest, most mature and most diverse market. The private debt side is only about 3% of the market but insurers play a large role. In Europe the UK is clearly in the lead: non-listed funds account for about 10% of the market, compared to 4% for Continental Europe.
“In the UK in H1 2022 non-bank lending surpassed that of banks and building societies for the first time on record, according to research by Bayes Business School,” she said. “Europe is also evolving rapidly and will accelerate further.”
The European debt universe has doubled in size in the last seven years, with the number of vehicles (mostly closed-end structures) increasing from 37 in 2016 to 80 in 2022, while target equity has increased from €25 billion to €51.3 billion’s worth of assets.
“There’s a lot of senior lending out there,” said Pylypchuk. “About 87% of the total is in the senior lending space or the mixed senior, subordinated and preferred equity space. Given current market conditions, senior is going to be the choice when it comes to loan generation.”
The funds that specialise in senior lending tend to be larger in size, €650 million on average. Multi-country strategies dominate and represent around 70% of the total.
“It’s a faster, opportunity-driven market, where you can execute more quickly because the regulatory and reporting requirements are not strict,” she said. “But the regulators are starting to realise that it’s a growing space and are looking into it.”
There is also a great strategic opportunity for ESG-focused debt propositions because the European commercial real estate market is under enormous pressure to decarbonise and it’s not easy for traditional lenders to move into that space.
The key challenge is the lack of transparency, particularly in the mezzanine segment. INREV is addressing this issue with its Debt Vehicle Universe database that seeks to increase visibility for investors. “It’s a window into that world,” said Pylypchuk. “More data means more knowledge and a better understanding of the market.”