Growing demand for alternative financing in the European real estate market

A new study by the Empira Group highlights an increasing need for alternative real estate financing as the European market faces a significant refinancing gap. A large number of commercial real estate loans are set to mature in the coming years, creating challenges for borrowers and opportunities for non-bank lenders.

In 2025, approximately €130 billion in commercial real estate loans across Europe will reach maturity, with an even larger volume of €185 billion following in 2026. Office properties represent the largest share of refinancing needs, with loans worth around €50 billion due in 2025 and €65 billion in 2026. The residential and logistics sectors are also affected, with annual maturity volumes in the double-digit billions. Many of these loans were secured during a period of low interest rates and now require refinancing at significantly higher costs. Between 2014 and 2024, the average interest rate for loans with a 1–5 year fixed term rose from 1.90% to over 4.01%.

The study estimates that by the third quarter of 2024, the financing gap in Europe will reach €86 billion, accounting for 13% of all commercial real estate loans maturing between 2025 and 2027. As a result, alternative lenders are expected to play a greater role in bridging this gap.

The Rise of Private Debt in Real Estate Financing

The market for non-bank real estate financing has grown significantly. In Germany, the value of loans provided by non-bank financial intermediaries increased from $5.072 trillion in 2014 to $8.237 trillion in 2023, a 62% rise. Investment funds dominate the private debt sector, holding an 89.5% market share. Globally, capital raised for real estate financing by non-bank institutions also increased, reaching €210 billion in 2021, up from €70 billion in 2014.

Traditional banks face increasing challenges in expanding their loan volumes due to higher interest rates and stricter regulatory requirements under Basel III and IV. The required equity backing for commercial real estate loans is expected to increase by around 10% in the medium term, with variations depending on risk class and loan term. These factors have made alternative financing options more essential to maintaining investment activity.

Opportunities in the Mid-Market Segment

While large institutional investors focus on high-value transactions, mid-sized projects requiring financing between €30 million and €75 million are often overlooked. This segment presents opportunities for alternative lenders to provide tailored financing solutions that traditional banks may not offer.

Back Leverage and Capital Efficiency

Private debt investments offer a more stable return compared to traditional equity investments, typically ranging from six to twelve percent. They also involve lower market risks and shorter capital commitments. The use of back leverage—borrowing at the fund level—improves capital efficiency by allowing additional loans without an immediate increase in equity. This flexibility helps funds respond more effectively to market changes.

As the refinancing gap continues to grow, alternative lenders are positioned to play a key role in maintaining liquidity and stability in the real estate market.