FAP Group
The FAP Real Estate Private Debt Report Germany 2024
The latest annual report on financing from Berlin-based FAP Group reveals a transformative year for Germany's alternative real estate financing market, driven by tightening liquidity and strategic pivots from lenders.
Marking the tenth anniversary of publishing its annual insights, FAP’s newly rebranded “Real Estate Private Debt Report” provides an expanded analysis of the market, including whole loans, stretched senior loans, and a shift in the role of mezzanine financing, as well as insights from industry leaders.
Despite recent interest rate cuts by the ECB, FAP’s report highlights ongoing caution in traditional lending. Banks are increasingly hesitant to finance projects without substantial pre-leasing or pre-sales, while capital constraints among institutional players mean a more selective approach across the board. As Hanno Kowalski, Managing Partner at FAP Invest, explains, this has opened doors for alternative lenders: “We’re seeing an uptick in inquiries, especially since Q2 of 2024. Alternative lenders, with their faster approval times, are landing deals that would traditionally go to banks.”
The report highlights a clear trend: whole loans and stretched senior loans are now central to alternative financing, while mezzanine debt has definitely taken a back seat. Whole loans, with their loan-to-value (LTV) ratios averaging around 74% for existing properties, offer more conservative leverage than mezzanine financing, which typically saw higher ratios in previous years. This pivot toward whole loans reflects both lender risk-aversion and evolving investor demands, with FAP’s findings showing a notable interest from British and North American capital in these debt products.
Asset class preferences and ESG impact
Residential and mixed-use properties remain the preferred assets for alternative lenders, with stable cash flows in prime locations continuing to attract financing. Yet the report also notes a shift in appetite for office properties: interest has dropped from 94% last year to 81%, with investors prioritizing high-ESG-compliant buildings in prime locations due to sustainability obligations and rental demand volatility. Demand for hotel assets is on the rise, seeing a 15% increase in interest year-over-year as the sector recovers.
Kim Jana Hesse, Head of Capital Partners at FAP Finance, points out the impact of market shifts on loan ticket sizes: “Whole loans have gained significant ground, now comparable in volume to traditional bank financing. Costs of financing through whole loans have become more competitive with traditional bank loans.” The report’s analysis suggests that alternative financing providers are adapting to a risk-conscious market where smaller, manageable financing tranches are favored over large-scale debt issuance.
Selective Development Financing and Regional Preferences
While most lenders surveyed prefer income-generating properties, 86% indicated a willingness to consider highly resilient development projects. However, the appetite is limited to projects with strong fundamentals, particularly in Germany's Class A and B cities, with Class C and D cities seeing minimal interest. International investors show a clear preference for Germany’s major urban centers and also express interest in cross-border financing opportunities, especially in Western and Northern Europe.
As FAP marks a decade of publishing its insights into Germany's private debt landscape, their latest findings shine a light on a market in flux, with alternative lenders now at the forefront of financing solutions amidst tightening liquidity and changing asset demands. Whole loans and ESG-aligned investments are poised to gain even greater traction as lenders adapt to meet investor expectations in a recalibrated financing landscape.
Over the coming year, sustained pressure on liquidity and cautious lending will most likely steer the sector towards more conservative, high-quality assets, with resilience and strategic positioning proving essential for those navigating the current complex lending environment.
