Alternative funds grow lending footprint in European real estate sector

Created: 21 Mar 2023

Europe’s property market has experienced recent challenges, with banks reducing lending to the sector and causing a funding gap for property companies. Filling this gap: pension funds, insurers, and private equity firms are armed with over $8 billion to invest in European property debt, making it the second most popular area for investment. 

This has allowed investors to step in where banks have exhibited excessive risk aversion, with investors observing the potential to make strong risk adjusted returns in the context of a stable European economic outlook, high employment, and tenancy payments underpinned by regulatory support.

Alternative lenders are being careful and hedging their bets, pushing whole loans, which puts investors in a better position to recover funds should borrowers struggle. These loans are a hybrid between senior bank credit and mezzanine debt, positioning investors well in negative outcome scenarios. This approach has proved popular with investors, who see it as a way to generate high returns with manageable risk.

Banks have traditionally dominated property lending, yet post-financial crisis, a number of credit funds and insurance companies have stepped into the space. In the first half of 2021, these lenders accounted for a greater share of new property loans in the UK than British banks, according to a survey by Bayes Business School. 

Regulatory, interest rate, and price stability are fundamental to these dynamics, with the Spring Budget making no changes to supportive measures in place for the sector such as stamp duty thresholds. The Stamp Duty Land Tax (Temporary Relief) Act 2023, which was enacted on 8 February 2023, reduced the amount of stamp duty land tax chargeable on the acquisition of residential property.
The challenges facing the property market in Europe have created opportunities for alternative lenders, with investors stepping in to provide financing where banks have reduced their lending. While the funding gap is still enormous, the cautious approach taken by lenders has helped mitigate some of the risks associated with the sector. 

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