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Investors Pile Into European Property Debt as Banks Bail on Landlords

Banks are being compelled to pull back from real estate lending in the face of falling values and the imminent introduction of new Basel III rules that introduce a minimum capital floor.

(Bloomberg) -- With banks reducing lending to Europe’s wobbly real estate markets, investors are stepping into the breach to provide much-needed financing for strapped property companies. 

Since last year, pension funds, insurers and private equity firms have accumulated more than $8 billion to invest in European real estate debt, making it the second most popular bet in the sector, according to data from research firm Preqin. 

Without new financing sources, landlords face pressure to sell properties to pay off loans, a scenario that would further weigh on valuations and trigger a downward spiral. But the fresh cash is just a fraction of the looming funding gap. PGIM Real Estate expects European banks to withdraw as much as €125 billion ($132 billion) from property lending, just as about €200 billion in debt matures this year and next.

The extent to which new lenders can fill the gap — and the price they’ll charge to stabilize balance sheets — will start taking shape at the annual Mipim property conference in Cannes this week. Unlike past years when multi-billion-euro portfolios changed hands, credit is the main focus for the 23,000 attendees.

“Debt has moved up to the top of the investor priority pile,” said Dan Pottorff, head of debt investment at Tristan Capital Partners. The private equity firm just completed raising a €500 million fund to invest in property loans. 


Despite the volatility roiling real estate markets, investors see potential to generate high returns with manageable risk. While property prices are declining in markets like the UK and Sweden, Europe’s economies are holding up despite the energy crisis and higher interest rates, and employment remains high. That means tenants are likely to keep paying. 

“Optimism may seem counterintuitive amid a backdrop of prevailing market volatility, tightening monetary policy, and a looming recession,” Michael Boxer, co-head of private real estate debt at CentreSquare, said in a report this month. “However, as real estate debt providers, we are perhaps the most enthusiastic we have ever been.”

In addition to a series of new funds, US insurer W.R. Berkley Corp. has backed Birchwood Real Estate Capital, a recently established debt platform founded by former Blackstone Inc. executive Lorna Brown. Los Angeles-based CIM Group LLC, which manages about $10 billion of real estate debt, is now establishing a team to lend in Europe and has hired property-debt specialist Tal Lev-Ari in London.

Banks are being compelled to pull back from real estate lending in the face of falling values and the imminent introduction of new Basel III rules that introduce a minimum capital floor. On top of that, accounting changes tighten rules on bad loans.

“That’s all adding up to make banks pause,” said Andrew Radkiewicz, global head of private debt strategy at PGIM Real Estate.

While real estate lending in Europe has traditionally been dominated by banks, that began to change after the financial crisis. Dozens of credit funds and insurance companies have now begun lending. In the first half of last year, these lenders accounted for a greater share of new real estate loans in the UK than British banks for the first time, according to a survey by Bayes business school. 

Cracks are starting to show in Europe’s real estate market and that could mean opportunities for alternative lenders. Apollo Global Management Inc. sold off a loan on a London office building, Blackstone Inc.-sponsored mortgage securities was declared to be in default earlier this month, and landlords Adler Group SA and Corestate Capital Holding SA are in the process of restructuring their debts, Bloomberg News has reported.

“Our alternative credit business is seeing a significant influx of activity,” Michael Zerda, co-chief investment officer at LaSalle Investment Management, said in a Bloomberg TV interview. “It is a very powerful source of capital in the marketplace today.”

While the new financing is welcome, the funding gap is set to be enormous and alternative lenders are being careful. To hedge their bets and squeeze out higher margins, some are pushing so-called whole loans — a hybrid between senior bank credit and mezzanine debt. That would put investors in better position to recover their funds if the borrower struggles. 

“We are very much focused on the ‘whole loan’ product because we think it is the answer to some of the issues that are going to come,” said Dale Lattanzio, managing partner of DRC Savills Investment Management. 

For now, the focus is on refinancing rather than lending against new deals. That’s because there’s few transactions happening other than where landlords are under pressure to sell. 

“The market fracturing has made it even more interesting to focus on credit this year,” said Jay Kwan, a managing director at QuadReal Property Group, the real estate arm of British Columbia Investment,. 

© 2023 Bloomberg L.P.

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