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Debt can be a good alternative for real estate right now

As they provide stable and trusting lends to developers, in current uncertain conditions debt funds can work alongside equity

8 MIN READ September 02, 2022

As inflation goes up, it is expected to see an increase in interest rates on loans. At the same time, we are seeing an escalate in development prices in the real estate sector. In a volatile market like the current one, debt funds become attractive to guarantee liquidity, especially if associated with equity.

Talking about general real estate investments in Europe, according to preliminary data from CBRE (Coldwell Banker Richard Ellis), it reached €152 billion in the first half of 2022, being the strongest ever first half of a year.

According to Real Estate Capital Europe, private real estate debt managers features organizations tracked by them raised $80.3 billion between them during the years 2017 to 2021 – an increase of 12.6% compared to 2016 to the end of 2020 period.

Mauro Savoia, Chairman and CEO of Three Stars Capital Partners, says that debt funds are able to work during complicated market environments, such as the one Europe faces right now, because “they provide a good financing solution” in the current uncertain conditions.

For the past two years and a half, with COVID-19 and all the challenges resulting, a lot of funds to raise money for debt, so they are ready to invest in new projects. At the same time, Gregoire Millet, Director at Starz Real Estate explains right now there is a gap for liquidity in the market and projects in need of money to be executed.

During covid, Millet explains that we had two parameters for debt funds: the one that was raising money and could escoal all the investments right the way, mostly backed up by investment banks, that could give up the leverage.

And there were debt funds, like Starz, relying on leverage, which had a hard time competing with banks, with a lot of management to do and raising funds to invest as soon as possible and trying to achieve leverage and invest again. “Depending on how it was structured, some people had a good year and others were folded.”

Banks or debt funds?

A survey data from Statista shows that approximately 52% of industry experts expected a moderate increase in debt funding for real estate investments to come from alternative lending platforms in 2022, and 57% of experts expected a moderate increase in debt financing from non-bank institutions.

“Debt funds are taking the banks' place, filling the liquidity gap”, Millet explains. "It’s more expensive than banks, but sometimes it is better to pay a little more and have some liquidity instead of no liquidity.”

In other cases, “rates offered by debt funds are usually at a good premium to the ones offered by banks”, says Savoia. “During this post-covid high inflation scenario, they provide a stable alternative to bank loans.”

In basic terms, debt funds can be a good alternative as they provide stable and trusting lends to developers.

But, talking about cost raising and seeking the best opportunities in a moment with high inflation, Millet says that “overall it’s the same thing for everyone, bank or debt funds, you are just an investor and take a lot of precautions with cost and contingency.”

Europe GRI 2022

Perspectives for the future

For Savoia, who has always worked with debt funds, but also works with mezzanine debt in his company – another way to fund projects there can be interesting for the real estate market and one that had leverage during covid –, “business will be predominantly with debt funds” in 2023. 

“We are having the best year since we started, and 2023 it is going to be the same thing”, according to Millet.

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Written by Gabriela Colicigno
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