A key trend fleshed out during our series of Outlook Investment Briefings in recent weeks was that financing is becoming more readily available across Europe.

A key trend fleshed out during our series of Outlook Investment Briefings in recent weeks was that financing is becoming more readily available across Europe.

At Mapic in Cannes we heard from Severin Schöttmer, director special property finance at Aareal Bank, that his bank is open for business in virtually all markets. The only real exceptions, he said, are Romania and Greece.

Rival Helaba is also seeking to expand its presence in a number of key markets. In Paris, Renaud Jézéquel, general manager of Helaba, France said the bank is working to grow its presence in there, while his colleague, Thomas Völker, announced at our Nordic Outlook briefing in Stockholm that the German lender is opening an office in the Swedish capital after 10 years of lending in the Nordic region.

Anecdotal evidence to be sure, but significant nevertheless. Speaking at our Outlook briefing in Frankfurt, Derk Opitz, a partner with law firm Ashurst which specialises in real estate and asset finance, confirmed that liquidity is not a major issue in the current market.

‘We’re seeing more players on the debt side – not so much debt funds, they are too expensive in the German environment – but insurers who are coming into the market en masse with low interest rates.’

Strong competition
The German market is a case unto itself given the strong competition between traditional lenders like Aareal, Helaba and Pbb Deutsche Pfandbriefbank, and the arrival of alternative lenders like Allianz Real Estate and AXA Investment Management - Real Assets which have aggressively beefed up their lending portfolios in recent years.

Meanwhile many real estate debt funds - which were hailed as potential saviours in the wake of the global financial crisis as real estate lending ground to a complete halt - are languishing. The key problem they face amid increasing competition from traditional and alternative lenders is finding suitable assets to meet their investors' risk-return profiles, according to Philipp Wass, senior analyst at Berlin-based rating agency Scope. He has crunched the latest numbers released by European real estate debt funds operators and the results do not look pretty.

So far, the 54 real estate debt funds launched across Europe since 2010 have only been able to invest a mere 29% of the €33.6 bn raised by institutional investors, he told PropertyEU. 'Debt funds managers are between a rock and a hard place.'

When traditional banks shut down on lending after the outbreak of the financial crisis in the fall of 2008, many investors could not even secure financing from banks for core properties in top locations rented out to tenants with perfect creditworthiness, Wass pointed out. 'Fund management companies and institutional investors alike saw a gap in the market begging to be filled.'

Situation has changed since 2009
Not surprisingly, the first debt funds set up in 2009 had no trouble raising capital and finding low-risk mortgage loans to invest in. However, the situation has changed since then. With the European Central Bank pumping cash into the markets in order to get the eurozone economy back on track, traditional lenders no longer face liquidity problems. Currently, banks can refinance their mortgage loans through real estate backed securities – or in the case of German lenders through Pfandbriefe – at close to 1%.

'This enables banks to offer interest rates of around 2% for low risk property financing thereby enabling them to undercut debt funds which need to charge higher interest rates in order to generate the proposed yields for their investors,' noted Bernhard Koehler, CEO of Swisslake Capital.

Indeed, Koehler believes real estate debt funds have passed their peak and are now on the decline.

That does not necessarily mean that the curtain has fallen for real estate debt funds, but fund managers and their investors may need to change their script if they don't want to be kicked off the stage.

So far, debt funds have primarily targeted the same property financing deals as banks and insurers: mortgage loans with loan-to-value (LTV) ratios of up to 60%. 'Investments in these kinds of mortgage loans are no longer interesting for debt funds due to shrinking yields,' said Martina Hertwig, partner at Hamburg/based auditing company TPW.

Another thing we learned from our Outlook series is that investors are being forced to move up the risk curve due to the growing difficulty of deploying capital in core assets. The key issue holding the market back is lack of product but another is lack of affordable financing for value-add real estate, according to Stephen Miles, head of EMEA, Capital Markets at CBRE.

At the same time, booming property markets in countries like the UK and Germany are luring developers back onto the scene. TPW's Hertwig claims that most are willing to accept high interest rates on financing exceeding LTV-ratios of 60% in order to get their projects underway.

If debt funds are looking for a new role to play on the European real estate stage, this may well be their cue.

Judi Seebus
Editor in chief