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The recent 11th Real Estate Finance Day in Frankfurt brought together bankers, alternative financiers, and corporate finance heads for a day of insightful discussions. One recurring theme resonated across the event: traditional banks are increasingly unwilling to take on all but the most secure financing opportunities, opening the door wide for alternative lenders to step in.
Among the companies presenting their perspectives were the event’s lead sponsor, FAP Group, and Caerus Debt Investments, a long-time specialist in real estate debt. Both underscored the same message: the retreat of banks has created a golden opportunity for private debt funds to redefine real estate financing in Germany.
In its recently-published landmark 10th-anniversary Real Estate Private Debt Report, FAP Group provides a comprehensive overview of Germany’s evolving debt market. The report highlights a decisive pivot away from mezzanine financing toward whole loans and stretched senior loans. These instruments, with loan-to-value (LTV) ratios averaging around 74%, offer conservative leverage aligned with today’s cautious market sentiment.
“Whole loans are now as significant as traditional bank financing,” said Hanno Kowalski, Managing Partner at FAP Invest, during one of the event’s panel discussions. He emphasized their growing competitiveness in cost and structure, which makes them increasingly attractive to alternative lenders and borrowers alike. “Whole loans have gained significant ground, now rivaling traditional bank financing in both volume and cost-effectiveness. These structures are bridging the gap left by cautious banks.”
The report also identifies key trends:
- Residential and Mixed-Use Assets Dominate: Investors remain focused on stable cash flow in prime locations.
- ESG-Compliant Properties Gain Traction: Sustainability is a driving factor as investors shy away from non-compliant buildings.
- Resurgence in Hotel Financing: Demand for hotel loans rose by 15% year-over-year as the sector recovers.
Debt investments as the smart, safe choice
Michael Morgenroth, CEO of Caerus Debt Investments, offered a complementary perspective. Writing in the event’s accompanying magazine and speaking on a panel discussion, he made a strong case for debt investments as the smarter, safer choice in today’s market.
Morgenroth outlined the current landscape: rising interest rates have compressed property valuations, institutional investors have shifted capital back into bonds, and traditional banks have pulled back from lending. This has left a financing gap that private debt funds are well-placed to fill.
Debt investments, particularly whole loans with LTVs of up to 75-80%, offer institutional investors a way to gain exposure to real estate without the full risk of equity. Morgenroth highlighted three key benefits:
- Attractive Returns: Whole loans now yield returns comparable to equity, thanks to historically high credit margins.
- Defensive Characteristics: Senior collateralization provides a safety buffer, absorbing potential losses before impacting lenders.
- Stability in Uncertain Markets: Predictable cash flows from loan repayments mitigate the volatility often seen in property valuations.
“Debt investments allow institutional investors to capitalize on real estate’s potential while avoiding its full spectrum of risks,” Morgenroth said. He warned, however, that these favorable conditions might not last indefinitely, urging investors to act quickly to take advantage of the current liquidity constraints.
Broader implications for German financing
The Real Estate Finance Day also shed light on the broader implications for Germany’s financing landscape. As banks scale back, alternative lenders are stepping up with faster approval times and innovative financing structures. The FAP report notes a clear preference for high-quality, resilient assets—particularly in Class A and B cities—and a cautious approach to development financing.
At the same time, the market is not without its challenges. Rising interest rates and declining property valuations increase the risk of defaults, particularly in more leveraged transactions or secondary markets. Institutional investors are also proceeding with caution, mindful of the potential for further economic headwinds to strain both borrowers and lenders. These risks underscore the need for a disciplined approach to debt investments, with a focus on conservative leverage and resilient asset classes.
At the same time, Morgenroth underscored that whole loans, with their defensive structure and attractive yields, are uniquely positioned to weather today’s market volatility. His analysis, coupled with FAP Group’s detailed report, demonstrates that private lenders are no longer secondary players—they are reshaping the real estate financing landscape, taking on roles that banks have relinquished.
The takeaway from FAP Group, Michael Morgenroth and other participants is unequivocal: real estate debt finance has moved from the margins to the mainstream. This is a pivotal moment where private debt is emerging not just as an alternative but as the backbone of new financing models for German real estate.
For institutional investors, the challenge is no longer deciding if debt funds should be part of their strategy, but determining how quickly they can capitalize on these opportunities. With high yields, lower risks, and unparalleled market access, private debt funds are poised to drive the next chapter of growth in Germany’s real estate market.
