With the ongoing retreat of the traditional lending banks from financing anything but rock-solid and blue-chip projects, a further wave of new alternative lenders have been eyeing up prospects in the European lending markets, with the announcement recently of several new providers looking to move into the space.
The real estate private debt market in Europe is currently worth about €80 billion, and rising. In particular, demand for financing from both the residential and commercial real estate sectors has been buoyant. COVID-19 has had little impact on the demand for financing throughout the pandemic, with pricing holding up strongly as well, debt lenders seem to agree.
The alternative lending sector is still growing because banks can't - and don't want to - cover the demand for financing, due to the sheer volume of development taking place, on the one hand, and on the other because of much tighter regulation and more restrictive policies in their credit approval processes.
Speaking at a recent industry briefing in Frankfurt, Martin Braun, the founding partner of Nexus Capital Partner saw an ever more active role for alternative lenders, with the financing environment for banks likely to stay difficult for the next two or three years. “Traditional lenders have become more selective, they only finance investments that tick all the boxes and they are not interested in non-core products, while investor demand is very strong", he said.
According to Johannes Märklin of Corestate Capital Group, speaking at the same event, “Investors, developers and real estate players buying portfolios need quick and reliable financing. Banks will only take a small part of this volume, so other sources of funding are coming and will continue to increase”.
There is space as well for the traditional banks, who also had a good year - albeit a more selective one, but according to new figures, senior lending was also up by 60% in 2021.
“Private debt is not a substitute for bank financing but it’s complementary. There is a very big opportunity for us where banks don’t participate and our forecast is that institutional investors will deploy even more money on the private debt side in 2022,” said Corestate's Märklin.
With Germany retaining its position as the dominant real estate market in Europe, new foreign capital from North America and Asia is looking to get more involved in opportunities here.
Among those setting up shop in Europe are Los Angeles-based Ares Management Corporation, which has been involved in US real estate debt for the last ten years. Ares has hired an experienced team to spearhead their European drive, including Philip Moore from Carlyle, Alessandro Luca from Goldman Sachs and Anisa Dudhia from lawyers Clifford Chance.
Ares said it plans to focus on originating and managing commercial real estate loans against quality Western European assets. It will target a range of sectors including residential, industrial, office, hospitality, retail and mixed-use assets. The company will seek to leverage the relationships fostered by its real estate equity, corporate direct lending, and US real estate debt platforms to source deals. Beyond that it only said that it had done its maiden deal, a €113 million loan against a Belgian landmark office complex through a fund managed by its own Ares Real Estate Group.
Other US managers entering the European debt market recently have been AllianceBernstein, Invesco Real Estate, and LaSalle Investment Management with its first euro-denominated fund. From the UK, well-known names launching debt funds have included Tristan Capital Partners and Cheyne Capital.
The largest European real estate debt fund that closed in 2021 was PGIM's seventh fund in its high-yield series, PGIM Real Estate Capital VII (PRECap VII), which closed on €1.82bn. Among its commitments are a mezzanine loan to support the funding of close to a dozen logistics projects totaling over €500 million across Italy; a preferred equity loan for a highly-regarded specialist developer and operator, to finance £240 million of Purpose Built Student Accommodation (PBSA) developments located in the UK as well as mezzanine loan and preferred equity commitment to support the redevelopment of a €125 million office building in Dublin, Ireland.
Meanwhile, recent German arrival to the sector Aukera Real Estate AG said it had increased the equity commitments of the debt funds it advises to just over €1bn within its first fifteen months. The Essen-based company focuses on senior collateralised real estate loans as well as mezzanine debt and project financing, specialising in the DACH and Benelux regions.
And Munich-based Kingstone Debt Advisory has teamed up with DZ Privatbank of Luxembourg to launch their own fund, FOCUS Mezzanine Germany I. The AIF fund is targeting a volume of up to €200m, and is geared towards savings banks and credit unions. The asset preference is 50% residential real estate, with the remainder mainly offices.
The whole debt lending sector has become highly dynamic in recent years, and shows no sign of slowing down, with so many new financing opprotunities opening up across all levels of the capital stack. REFIRE will have plenty more activity to report on through 2022, we're sure.
