In continental Europe, private real estate debt is still an emerging market and remains far behind the UK, and particularly Asia and the US when it comes to the market share in real estate financing. This keeps changing though – and the experience made over the last 18 to 24 months has further strengthened its attractiveness for institutional investors. Because contrary to the real estate equity market, real estate finance did not see an investible supply bottleneck. Instead finance opportunities were plenty, securing investors’ opportunities to allocate capital to ‘put the money to work’ and avoid the storm of uncertainty. Just, don’t get struck by a foul-credit-lightning – the quality of the underlying asset remains key in today’s environment.
As COVID-19 hit Europe and the US in early 2020, global uncertainty spiked, public life was locked-down, and markets have dried. Since then, a couple of times there were hopes and optimism that the worst is over and the situation normalises. However, the pandemic has proven dramatically unpredictable and at the time of writing this, Germany is in the middle of its fourth and potentially most severe wave so far.
This created an environment during large parts of 2020 where both investors and property owners remained at the side lines, waiting for the fog of uncertainty to lift. Only few properties were offered to the market, which led to a shortage of investable supply, particularly in the core spectrum. For low-risk assets, however, investor demand was strong, which lead to a severe imbalance of supply and demand causing prices to rise.
At the same time, banks quickly became highly risk averse concerning any financing that was non-core. This has strengthened the role of alternative lenders like private real estate debt funds, who stepped in and filled the financing gap to some extent.
In contrast to real estate equity, at the debt side of things, there was no shortage of investment opportunities. As the chart below indicates, investment opportunities were plenty and investors were able to allocate money and generate income.
The data is based on CORESTATE Groups sourced investment opportunities for both equity and real estate debt. As it is based on internal analyses, it does not necessarily replicate the entire market’s activity and has to be seen as a proxy. Still, the message is clear, the private debt market tends to be more resilient in times of crises when it comes to remaining liquid and investable.
In a challenging environment, however, it is key to assess the risk of the underlying property properly and to understand where the market is headed. In depth micro and macro research and an extensive real estate asset management expertise can help doing so.
* 6-months moving average; only CORESTATE group sourced opportunities used in this analysis, so the results can only be a proxy to the whole market.
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This presentation has been compiled by Corestate Capital Investors (Europe) GmbH, a company of the CORESTATE Capital Group, 02.07.2021.
