Empira: Demand for alternative financing in the real estate market increases
The Empira Group’s latest study on the market for alternative real estate financing (Private Real Estate Debt) highlights a growing refinancing gap in the real estate market, which opens up lucrative investment opportunities for institutional investors. In the coming years, a large number of loans in the commercial European real estate market are set to mature within a short period (Maturity Wall). For 2025, a maturity volume of around 130 billion euros is expected, while 185 billion euros of existing loans will mature in 2026.
Office properties, in particular, will have the largest share of refinancing needs, with loans maturing worth around 50 billion euros in 2025 and even 65 billion euros in 2026. The residential and logistics sectors are also affected, with annual maturity volumes in the double-digit billions. Since many of these loans were taken out during a low-interest-rate phase, they now need to be refinanced at significantly higher interest rates. Interest rates for loans with an initial interest rate fixation of 1–5 years increased from an average of 1.90% in 2014 to over 4.01% in 2024. According to estimates, a loan financing gap of 86 billion euros will emerge in Q3 2024 in Europe. This represents 13% of all European real estate loans maturing between 2025 and 2027.
'Although the interest rate situation has eased somewhat, traditional loan structures can no longer fully cover the needs in many sub-markets. Looking ahead, I expect targeted private debt strategies to become a central element of financing solutions,' explains Lahcen Knapp, founder and chairman of the board of the Empira Group.
Private Debt Market Continues to Grow Amid Pressured Banks
The market for alternative financing loans from non-bank financial intermediaries (NBFI) in Germany has grown from approximately 5.072 trillion USD in 2014 to about 8.237 trillion USD in 2023, an increase of 62%. Investment funds dominate the private debt business with a market share of 89.5%.
In addition to the rapid growth of the private debt market as a whole, the capital raised for real estate financing by non-monetary credit institutions has also increased significantly. In 2014, the capital raised worldwide for this sector was around 70 billion euros. By 2021, a new high of approximately 210 billion euros was reached. For banks, it is becoming more difficult to expand their loan volume, as higher interest rates tighten risk management and capital requirements. Stricter regulatory requirements under Basel III and IV also increase pressure. The required equity backing for commercial real estate loans (CRE) could, according to several impact studies by various consulting firms, increase by around 10% in the medium term – depending on the risk class and term, even more.
This makes alternative financing sources increasingly necessary to ensure adequate capital supply and prevent a slowdown in investment activity.
The mid-market segment, especially between 30 and 75 million euros, offers lucrative investment opportunities. Large institutional investors focus on large-volume transactions, leaving projects in the mid-market segment underfunded. Companies in this segment particularly benefit from tailored financing models that banks often cannot offer.
Back Leverage Improves Capital Allocation Efficiency and Fund Agility
While traditional equity investments offer higher returns, they come with significant market risks and longer capital lock-ins. Private debt, on the other hand, offers a more defensive investment form that combines stable returns of typically six to twelve percent with calculable risks in the real estate segment. The additional use of leverage at the fund level, known as back leverage, further increases the efficiency of capital allocation. This allows additional loans to be made without having to immediately increase the equity base, improving the fund's ability to react to market changes.