Charles Kingston
Hanno Kowalski, Kim Jana Hesse and Curth-C Flatow, senior management team at FAP Group
The launch of this year’s FAP Real Estate Private Debt Report Germany comes at a point where the market is still strained but no longer sliding. For institutional readers, the message is simple: capital is available, whole loans dominate, and Germany risks losing a rare window of international liquidity unless it can deliver more financeable deal flow.
Sentiment among financiers has improved materially since last year. As Hanno Kowalski of FAP told REFIRE directly: “After two very difficult years, we’re seeing an improvement from a very low level. It’s not rosy, but we’re no longer deteriorating — it’s a clear step up from last year.”
Across the market, the extreme crisis conditions of 2023–24 have eased enough for transactions to reappear and for some banks to accept haircuts on outdated loan positions. But the lending environment that has emerged bears little resemblance to the pre-crisis model. Alternative lenders have become the backbone of senior real estate finance, powered by whole-loan capital and increasingly by back-leveraged structures that narrow the pricing gap with banks.
Whole loans and stretched senior drive the new market
FAP’s data, as well as lender commentary, show whole loans and stretched senior structures as the core funding instruments of the current cycle. Banks remain slow, conservative and restricted by Basel III; borrowers want speed and higher leverage; and lenders want simplicity and control. Whole loans offer all three.
“Whole loans are state of the art,” Kowalski said. “Lenders want full control of the asset in a default and as few parties in the room as possible.” Average whole-loan LTVs hover around 72%, well above typical bank levels, and terms are converging with bank pricing. Execution speed is the decisive advantage.
Mezzanine remains thin. FAP finds it confined to small tickets from credit funds and family offices. High return expectations and limited project sizes have pushed it to the margins. There is some revival of larger tranches (€20–40m) from London-based investors targeting 10–13% IRR, made feasible through back-leverage, but these remain exceptions.
“Back leverage” itself has become the defining theme. “I’ve never heard the term used so much,” Kowalski said. “It was everywhere.” By refinancing through banks, alternative lenders can enhance returns and operate far more competitively.
Capital wants in, but Germany can’t absorb it
Perhaps the report’s most consequential finding is the mismatch between global capital and German deal size. Vast pools of international money have been raised for German real estate debt, particularly in London. But Germany cannot supply the €500–700m pipelines these structures require.
“The big international players say: we’ll put €500 million into a debt fund — but Germany doesn’t offer enough deals of that size,” Kowalski said. “Germany is not the UK or US — you can’t show everything at once.”
Foreign interest is high, but commitment remains limited. “There’s strong interest,” he said, “but not complete commitment. And this money won’t wait forever.”
Valuation adjustments add friction. While LTV ratios have stabilised, lower market values mean absolute loan volumes have declined, constraining financing even when headline ratios appear unchanged.
Asset preferences sharpened over the year. Residential and mixed-use remain most financeable; logistics continues to attract credit funds; hotels have moved sharply back into favour with credible operators; and life science and data-centre deals have cooled as regulatory and infrastructure realities bite. Offices remain financeable only when ESG-compliant and prime.
Geographically, the Top 7 cities still dominate cross-border demand. Yet more financeable opportunities are now emerging in C-locations, where smaller, well-capitalised local developers have weathered the crisis better than some metropolitan peers.
Project financing returns, cautiously
One of the more notable shifts in 2025 is the re-emergence of development financing after a near-complete freeze. New specialist funds are appearing, and lenders are again considering early-stage schemes when earlier inflated land loans have been repriced. Haircuts on land positions are increasingly visible, creating the flexibility required for refinancing and project continuation.
Even so, most alternative lenders still prefer stabilised, income-producing assets. But with many existing properties no longer delivering target returns at current rates, selective development is becoming attractive again for yield-driven lenders.
Kowalski’s message to REFIRE's readers is direct: “Deal with Germany. There is real potential on the debt side — but you need a foot on the ground. You can’t copy-paste a UK or US strategy into this market.” Foreign investors, he notes, often see Germany more optimistically than the locals: “It’s the largest continental market. It will find solutions.”
Implications for investors
Three conclusions stand out.
First, whole loans are no longer a crisis-era substitute but the new senior layer of German real estate finance, supported by deep international capital. Second, Germany must accelerate deliverable projects or risk losing the very liquidity that could ease its refinancing pressures. And third, tighter valuation discipline means borrowers face stricter absolute loan amounts, reshaping equity needs and feasibility.
The market is no longer in free fall. But it IS more selective, more competitive, and increasingly shaped by lenders who understand the German system. Or, as Kowalski cautioned again: “This money won’t wait forever.”