Tougher conditions favour the stalwarts in this year’s Debt Fund 30

The sharp rise in interest rates during 2022 created challenges and opportunities for real estate debt fund managers in European markets. The challenges included sourcing financing transactions, particularly in the latter part of the year when property investment activity fell significantly. Managers were also forced to factor in the enhanced risk in the lending market as rising borrowing costs ate into sponsors’ income.

However, in a less competitive financing market, in which banks became increasingly cautious, credit fund managers were also faced with the prospect of growing their loan portfolios. With investors more wary of the risks presented by real estate equity strategies at a time of falling capital values, the allure of diverting capital into debt increased.

At a time when overall fundraising for real estate strategies was down, the volume of capital in Real Estate Capital Europe‘s latest Debt Fund 30 has grown, indicating increased firepower in the credit space.

Here are three key talking points from the ranking.

1: Volume growth belies tough fundraising conditions

The 30 organisations that made this year’s ranking collectively raised almost $85 billion from third-party investors for their real estate debt strategies in the 2018-22 period. That represented a 5.8 percent increase from the previous ranking, which covered the 2017-21 period.

The total was not up as sharply as in the 2022 ranking, in which the total volume raised was up 12.6 percent on the 2021 iteration. However, it represented the largest aggregate volume of capital raised in a five-year period since the ranking was launched in 2019.

The increased total reflects investors’ growing interest in real estate debt, according to Barbara Maltha, principal in the Amsterdam office of capital advisory firm Hodes Weill. “We consistently hear investors talk about the lack of transparency around real estate asset values. This makes it easier for them to invest in real estate loans, because exact pricing of the asset is not as necessary.”

However, while investors do not need to be convinced about the rationale of real estate debt strategies, economic conditions made it more difficult for them to make allocations during 2022. The denominator effect also led to overallocation to real estate due to the falling value of fixed income portfolios.

“That has been the case across equity and debt strategies,” says Maltha. “The denominator effect held some back from making decisions. However, we also saw lots of funds come to the market following the covid pandemic, so there were more managers offering strategies to investors.”

Although the volume of capital across the ranking was up, most agree fundraising became a more challenging activity in 2022.

2: Despite new blood, the established cohort are dominant

In recent months, new entrants to Europe’s real estate lending market have voiced their ambitions in the sector. For example, in April, manager Fiera Real Estate launched its debut European debt fund, six months after establishing a real estate credit platform targeting the region. Prior to that, in February, Swiss asset manager Union Bancaire Privée told Real Estate Capital Europe it is fundraising for its first dedicated real estate lending vehicle – aiming to raise €300 million to finance residential development across Europe.

While new entrants are a notable feature, the ranking demonstrates a clear leading cohort in the industry. Eight of last year’s top 10 ranked managers remained in the top 10 this year. This time around, the leading 10 raised $54.2 billion, up from $49.3 billion in the previous ranking. It demonstrates that the leading cohort are not easily displaced in the European real estate debt fund market.

“We have seen a rising tide of investor allocations to experienced operators, more so because of the greater uncertainty,” says Maltha. “However, we still see a competitive fundraising market for debt vehicles.”

A relatively small number of managers entered the space early, in the wake of the global financial crisis, and have steadily built their brands as lenders in the European property market through multiple fundraisings. At the top of the perch remains AXA IM Alts, seemingly out of sight of the rest with its $13.3 billion of fundraising.

Throughout the industry, sources say lending conditions are favourable, but capital allocations are going to more established players. “If you have a track record, it is an amazing time,” says one manager.

3: US and UK managers lead the market

Of the total circa $85 billion raised by the top 30, just over $26 billion was done so by US-headquartered organisations. Some of those managers – nine in total – have long established European property lending businesses, with well-connected teams on the ground, predominantly in London. Others have entered the market in recent years, attracted by the returns on offer in Europe.

“The European non-bank lending market is not as mature as the US, so lenders still benefit from less competition,” explains Maltha.

However, UK-headquartered managers also have a major presence in the ranking, accounting for an almost identical volume of capital raised as their US peers – just over $26 billion. London, the ranking shows, remains the epicentre of Europe’s alternative real estate lending market.

Paris has the second greatest concentration of managers, albeit with AXA accounting for more than half of the capital raised. In total managers from the French capital raised $22.6 billion of capital in the five-year period.

Despite the strong presence of US-headquartered managers, Maltha says investor capital into the sector predominantly comes from Europe. “European investors seem to appreciate the debt fund offering in Europe. We also see signs of Asian capital again looking at European debt funds, to diversify from the US, which remains the main target for Asian investors. North American investors seems to be most active in their domestic markets.”

The ranking suggests Europe’s real estate debt market is on the radar of a wide profile of investors, although making allocations in today’s uncertain economic environment is far from straightforward.