In the coming years, real estate loans worth several hundred billion euros will need to be repaid, and experts expect a financing gap in the double-digit billion-euro range.

In an interview with Börsen-Zeitung, Patrick Züchner, Chief Investment Officer at Aukera Real Estate, a real estate debt investment manager founded in 2020, notes that bank interest rates are currently between 4% and 4.5%. But many existing loans were made under much more favourable conditions. This leads to problems with the affordability of interest payments. „That’s why many loans are not being refinanced in the usual way but merely extended“, he explains.

According to the Federal Financial Supervisory Authority (BaFin), negotiations on refinancing for 100 billion euros worth of commercial real estate loans are due in 2025 and 2026 alone. That accounts for around 10% of the total commercial real estate loan volume.

Felix Schindler, Head of Research & Strategy at HIH Invest and Professor of Finance and Real Estate Economics at Steinbeis University, has calculated a refinancing volume of around 140 billion euros for the years 2025 to 2028. For the period 2024 to 2028, he expects a refinancing gap of about 20 billion euros. This gap, often resulting from restrictive lending practices by banks, can be closed through alternative financing sources.

Office buildings in particular are facing shorter life cycles due to trends such as work from home. To make them marketable again, fresh capital is needed. „The money typically doesn’t come from banks, but from alternative capital providers“, notes Züchner. According to him, many banks' valuation models find it difficult to reflect the potential future value of a modernised property. „Instead, they base their assessments on the current value and make provisions for risk accordingly. But this also inhibits them from taking on new risks.“ Anyone holding this calculated risk on their balance sheet longer than expected will inevitably have less capacity for new business.

Züchner observes that there are some strong equity investors in the commercial real estate investment market who are currently ready to buy. They could do so temporarily with 100% equity, but in the long term they need debt capital to achieve an adequate return. „The market lacks debt capital, which is needed for a faster recovery and to increase the number of transactions," he says. And banks will not be able to provide it. „Bank risk models reflect real negative factors, such as failed project developments, in the form of higher risk premiums. And those factors will remain in the models for quite some time.“

There still aren’t enough investors to close the financing gap left by the banks. „But some are coming back“, says Züchner optimistically. „In particular, insurers and pension funds – in the mid-size range with 5 to 50 billion euros in assets under management – are showing increasing interest in investing in debt funds.“ For instance, Züchner’s firm Aukera has been active since 2020 as an investment manager for a Luxembourg-based real estate debt fund.

Real estate loans are still considered very safe, as they are secured by liens on property. Lenders demand a risk and illiquidity premium on top of the ten-year German government bond yield, which currently stands at about 2.6%. „Institutional investors currently want a premium of 300 to 450 basis points“, explains Züchner. „That’s a good pickup compared to the risk-free rate or other investment alternatives.“

At the moment, Züchner primarily sees bridge loans in the market. These can involve project developments that are (almost) completed but cannot be sold at the originally calculated price in the current market – though they might sell in a year or two (bridge to exit). „These loans are relatively expensive, but they give developers time to take advantage of a better market window for their exit.“

In other cases, properties must meet new standards (for example sustainability rules). A bridge loan can help make the asset marketable again (bridge to transition or to green). This could also mean converting an office building in a secondary location into a residential property. Such financing is difficult for banks and therefore a typical situation for alternative financiers. As for deal sizes, Züchner notes that "in the early phase of the cycle, alternative lenders typically issue loans between 10 million and 30 million euros. Later in the cycle, ticket sizes rise to 50 million euros and above as more capital enters the market.“

Currently, it’s still difficult to bring three or more investors into a fund at once. "But we’re on the right track“, says Züchner. He believes a fund should have at least 100 million in investment capital, ideally 300 million euros. Since Aukera, like most others in Germany, doesn’t use leverage, that amount corresponds to equity capital. Each investor currently contributes around 50 million euros. Debt funds generate immediate interest income and are thus cash-flow positive from the start, unlike other fund types.

The term of a debt fund – for German investors usually a Luxembourg vehicle – typically ranges from seven to ten years. A standard alternative real estate financing deal lasts about four years. Some bridge loans are repaid after just 18 to 24 months. That money can then be reinvested. Pure bridge financing funds can therefore turn over their entire portfolio multiple times.