REFIRE, bestproject/Envato
The real estate debt market in Germany is at a pivotal moment. With traditional banks retreating from real estate financing, alternative lenders—especially private debt funds—are rapidly stepping into the void. This isn't a mere shift; it's a fundamental restructuring of the lending landscape, driven by heightened regulatory pressures, rising interest rates, and a financing gap that’s widening by the day. For institutional investors, the message is clear: there are significant opportunities, but the risks are just as stark.
Germany’s real estate banking giants—such as Deutsche Pfandbriefbank, Aareal Bank, and Münchener Hypothekenbank—are no longer playing their traditional roles with the same dominance. A sharp increase in risk provisions and stricter lending standards have seen these institutions tighten their portfolios, focusing on preserving capital and steering clear of risk-heavy deals. Property values are declining, interest rates are soaring, and commercial real estate in particular is feeling the squeeze. As a result, private debt funds are increasingly taking over as the go-to source of capital for many developers and property owners, stepping into what was once a bank-dominated domain.
INTREAL and BF.capital briefing
A recent press briefing from INTREAL and BF.capital, attended by REFIRE, highlighted this critical transformation. Uwe Janz, Head of Treasury & Private Debt at INTREAL, was unequivocal: "The withdrawal of banks continues. Real estate private debt can partially fill the gap." Institutional investors, aware of this shift, are now redirecting capital into the debt space. Data from INREV’s 2023 Investment Intentions Survey shows that nearly 80% of institutional investors plan to increase their allocations to real estate debt—a sign that the sector is poised for serious growth.
Janz also pointed to the hard numbers: €150 billion in commercial real estate loans will mature by 2025, with €40 billion at risk of not being refinanced. Across Europe, the total refinancing gap could hit €176 billion by 2027. “This is where alternative lenders, including debt funds, must step in,” Janz emphasized, leaving no doubt about the scale of the opportunity ahead.
Real estate debt yields and new structures
For institutional investors looking at real estate debt, the returns are increasingly hard to ignore. Manuel Köppel, Managing Director of BF.capital, was direct: "Yields are up significantly compared to the low-interest-rate era." While real estate debt still only represents about 1% of German institutional portfolios, the situation is changing fast. Köppel revealed that BF.capital is already in the process of raising capital for a new real estate debt fund, positioning itself to capitalize on the market’s reopening after a two-year lull.
The structure of real estate debt deals has also evolved. Pascal Scheeff, Managing Director Institutional Sales at BF.capital, noted that mezzanine financing—a favorite during the low-rate era—has largely fallen out of favor. "Both investors and fund providers are now focusing on whole loan strategies," Scheeff explained. Whole loans offer more flexibility in the current environment, and the numbers back this up: gross IRR (internal rates of return) in the real estate debt market are now between 6.5% and 8.5%—figures that would have been unimaginable just a few years ago.
Scheeff also stressed that real estate debt has regulatory advantages that make it even more attractive compared to equity investments. Under Solvency II and CRR 3 banking regulations, real estate debt faces lower capital requirements, freeing up institutional investors’ equity to deploy elsewhere. "Debt investments face fewer constraints, and that’s crucial when liquidity is tight," Scheeff said, driving home the point that this isn't just a temporary shift—it’s a fundamental rebalancing of risk and reward.
The Refinancing Gap and the Role of Private Debt
The refinancing gap in Germany’s commercial real estate market is where private debt funds can truly make their mark. As banks pull back from lending—especially in riskier sectors like office and retail properties—private debt funds are stepping into the breach. Janz and his colleagues were clear: these funds are no longer niche players. They are now acting as principal lenders, often providing both senior and junior tranches in whole loan structures, something that was previously the domain of traditional banks.
But the risks are real. As Manuel Köppel noted, “Debt funds can act more flexibly than banks, but they must still closely manage the risk of losses in their portfolios.” With property values dropping and refinancing needs rising, the margin for error is small. However, Köppel was quick to point out that, in the current climate, the risk-return ratio remains highly favorable, with high single-digit returns achievable even in senior-stretch or whole-loan deals.
A new paradigm in real estate financing
The message from the briefing was crystal clear: real estate debt is no longer a secondary option—it is becoming a dominant force in Germany’s property market. As banks retreat, private debt funds are stepping in with confidence, and the returns they’re generating are highly competitive. This isn’t just about filling a gap—it’s about seizing a market that is undergoing profound structural change.
“The landscape has shifted,” said Pascal Scheeff, summing up the broader market sentiment. “Real estate debt is now being used for acquisition financing, project developments, value-add properties, and bridge financing. This is not about passive capital—it’s about financing complex, high-demand situations where flexibility is key.”
We'll be reporting next month in more depth on the subject, with the publication of the 10th Anniversary Edition of FAP's annual Real Estate Private Debt Report (previously known as the Mezzanine Report, due out on October 7th). This delivers a comprehensive overview of the trends in the market, and how the key players are reacting to the somewhat sudden changes in the environment.
In short, the market is not just evolving—it’s transforming. The withdrawal of traditional banks from the real estate sector has created a unique moment for private debt funds, which are now in prime position to capitalize on rising demand. The refinancing gap, particularly in commercial real estate, is enormous, and the funds with capital to deploy are set to reap significant rewards. For institutional investors, this is a good time to act. The opportunity is here—and it’s growing fast.
