The momentum behind debt strategies was a key talking point at MIPIM, the world’s largest annual property conference, the 34th edition of which took place last week in Cannes, France.

Since the interest rate crisis began, myriad managers have either boosted their real estate debt fundraising efforts or set out to raise a maiden credit fund – many with Europe in their sights. Indeed, on the eve of MIPIM, PERE reported that US alternative asset manager Apollo Global Management had launched a Europe-dedicated vehicle targeting €1 billion from investors – the first commingled fund for its global real estate credit business.

Despite the size of the interest in debt investments, alternative lenders that PERE spoke with in Cannes said opportunities to deploy capital remain limited.

Oxford Properties, the real estate investment subsidiary of Canadian pension fund OMERS, is currently looking to build out its European lending strategy. James Boadle, senior vice-president, Europe, at Oxford, told PERE the investor has between €500 million and €1 billion to deploy in European credit over the next two years. It has yet to make any such investment, however.

“It has taken longer than expected to see opportunities to deploy credit in Europe on a relative basis globally,” admitted Boadle. “Banks have retrenched, but there are still pockets of appetite and distress has been slow to unwind. There has not been a glut of opportunities which everyone expected this time last year.”

This sentiment was shared by Timothée Rauly, global co-head of real estate at AXA IM Alts. The Paris-based investor is in the process of “reaccelerating” its financing activity across Europe and the US, according to Rauly. But, so far, opportunities are muted.

“I’m not surprised by this, but I expect the need from the market for non-bank lenders will accelerate from late 2024 into 2025. We have three years ahead of us to deploy significant debt capital,” he said.

Boadle added he expects more opportunities to arise if rates remain higher for longer and lenders “no longer extend and pretend.”

Europe’s ‘sick man’

While many non-bank lenders do not rely on market distress for their credit investments, expectations of a considerable refinancing shortfall in Europe – estimated at $100 billion through 2026 by manager AEW – are responsible for much of the appetite for debt strategies.

As such, many eyes are turned toward Germany, which accounts for the largest share of Europe’s debt funding gap at $38 billion, per AEW’s research. The spotlight on Germany has also intensified in recent weeks after local banks pbb Deutsche Pfandbriefbank and Aareal Bank revealed significant concerns over the health of their US commercial real estate loan books.

The situation carries distinct echoes of the main talking point at last year’s MIPIM: the collapse of two US regional banks and the mid-conference demise of Swiss bank Credit Suisse.

“A year ago, the conclusion was that the situation for European banks was different to US banks,” said Sophie van Oosterom, global head of real estate at Schroders Capital, at this year’s conference.

“It will be interesting to see how the German banks behave going forwards – they also have big exposure to Signa’s fallout,” she added, referring to the Austrian real estate company that went bankrupt in November.

She said sentiment is already changing and predicted German banks will retrench from real estate by not extending maturing loans, accepting early repayments and imposing stricter covenants.

This is not necessarily evident on the borrowing side, however. For Germany-based manager Patrizia, for example, the circumstances in its domestic market represent something of a double-edged sword. On the one hand, asset owners selling with incomplete business plans and developers collapsing due to soaring construction and debt costs are serving up lots of potential stock to acquire at attractive prices. On the other hand, the firm’s most important lenders are under increasing pressure.

“Germany was a safe haven for real estate, so it has been a high fall from there to the current situation,” said Philipp Schaper, chief executive officer for European real estate at Patrizia. “US exposure has created a tricky situation for the German banks, but it won’t bring down the system. They are being super selective, but they are still open for business. Importantly, leverage remains low.”

Cristiano Stampa, head of investments for Europe at Invesco Real Estate, said it is possible more European banks will get into trouble later this year or into 2025 – and he does not think the current dynamic is isolated to Germany.

“French banks are also carefully focusing their capital to progressively manage losses. We may start seeing quiet NPL or subpar trades as we approach year-end,” he said.

According to Scope Ratings, French banks had a 2 percent NPL ratio in commercial real estate at the end of 2023. However, real estate accounts for the largest corporate sector exposure in the French banking system, at 23.1 percent.

ECB in the bonnet

A few days before MIPIM got underway, the European Central Bank threw some water on the flame being nursed by real estate debt funds. In a press conference on March 7 in Frankfurt, ECB vice-president Luis de Guindos labeled non-bank lenders’ exposure to commercial real estate as “one of the main risks for financial stability at present.”

“It’s an overreaction,” said Rauly of the ECB’s statement. “Alternative lenders are only a fraction of the whole market, and the banks are where the problems are – particularly in the US.” He added some of the negative sentiment around US real estate is rubbing off on European regulators.

Van Oosterom said she understands why the ECB is concerned about alternative lenders’ real estate exposure given banks are heavily regulated, but added contagion to the financial system is less of a risk than it is with banks.

“Alternative lenders are financed by institutional investors taking an active position in the capital stack. Debt is never risk free and most alternative lenders are still regulated as fiduciary,” she said.

With European banks expected to be more selective with new lending and more conservative with maturing debt, the alternative lenders at MIPIM were optimistic that their time in the sun is just around the corner. But, at the same time, the borrowers were quick to tell PERE the banks were still there when they needed them.