Composite by REFIRE
German banks are retreating more deeply from real estate lending than many investors yet appreciate. At last week's Rueckerconsult INVESTMENT Expo in Berlin, Frederik Bräkling of Pax-Bank described a market where development finance at 50% LTV has become standard, second prolongations are increasingly common, and non-performing loan management is consuming internal resources that would once have supported new lending activity. Banks, he suggested, are being "almost forced" by regulatory pressure under Basel and CRD frameworks to create the opening for debt funds themselves.
The implication is that the shift currently under way in European real estate finance is structural rather than cyclical. Borrower-side data from the CREMI index, published this week, points in the same direction. Senior loan spreads in European commercial real estate have nearly tripled since early 2024, while banks are pricing senior debt at average leverage levels of roughly 53% LTV — conservative territory by the standards of the previous cycle.
That environment is creating space for non-bank lenders to expand far beyond the opportunistic role debt funds occupied after the Global Financial Crisis. Increasingly, debt managers are positioning themselves as part of the permanent financing architecture of the European property market.
Debt funds fill the gap
CAERUS Debt Investments, one of Germany's earliest specialist real estate debt managers, has financed roughly €2.7 billion in loan volume since 2012, focusing primarily on senior and whole-loan structures across the DACH region and Benelux countries. BF.capital is running a logistics-focused debt strategy targeting returns of 8–10%, while REInvest Asset Management's new whole-loan fund for prime office properties was fully placed before its official launch. The common theme is not distressed opportunism, but institutional demand for secured income in a market where traditional bank lending remains constrained.
The shift is also reshaping investor appetite within the debt market itself. During the low-interest-rate era, many institutional investors turned to mezzanine financing in pursuit of higher returns, often underestimating the risks embedded in highly leveraged structures. "People invested at 95% LTV for six percent returns," Michael Morgenroth, chief executive of CAERUS, observed during the panel discussion. "That is not risk-equivalent."
CAERUS itself stopped originating mezzanine in 2018, having concluded that the risk pricing was fundamentally inadequate. As the subsequent correction demonstrated, the decision proved well timed. It is a track record that lends some weight to Morgenroth's current view that senior and whole-loan structures represent a more defensible entry point into European real estate debt today.
The correction that followed appears to have fundamentally altered investor behaviour. A survey conducted by Kommalpha on behalf of pbb Deutsche Pfandbriefbank found that 46% of institutional investors surveyed already hold exposure to the real estate debt market. But the survey also pointed to growing caution around subordinated lending structures. "Investors are very cautious about riskier financing such as mezzanine products and are demanding significantly higher returns compared to the boom years," noted still-pbb board member Dr Pamela Hoerr.
The beneficiaries are increasingly senior and whole-loan structures positioned at the top of the capital stack. In a market where equity values in some sectors have corrected by 30–40%, that protection is no longer theoretical. Whole loans, in particular, are increasingly offering investors returns that once required mezzanine exposure, but with materially stronger collateral backing.
The appeal extends beyond yield alone. Unlike listed real estate or public bond markets, private debt investments are not subject to daily mark-to-market volatility. For institutional investors navigating uncertain pricing environments, that creates a stabilising portfolio component alongside traditional property and fixed- income allocations. As Morgenroth argued, debt investments "form a good mix for a well-structured portfolio" in which investors are "not putting all chips on one card."
Allocations still catching up
Despite the growing interest, allocations remain relatively small by international standards. Real estate debt still accounts for less than 1% of average institutional portfolios in Germany, suggesting considerable room for expansion if the market continues to mature. Hoerr explicitly drew comparisons with the United States, where non-bank lenders already account for a substantially larger share of property financing activity.
That comparison may prove increasingly relevant. As regulatory constraints continue to limit traditional bank lending capacity, debt funds are no longer simply supplementing the banks — they are performing financing functions that banks either no longer wish or are no longer able to undertake. Real estate debt is steadily becoming part of the permanent architecture of European real estate finance.