Study result: Real estate debt in the area of tension between return expectations and security requirements

The second most important motivation of respondents to invest in real estate debt after the risk-return profile is the demand for debt capital, which follows directly from the financing gap. On a scale of 1 ("insignificant driver") to five ("main driver"), the value for the study participants was 4.

According to the results of the study, investors prefer whole loans as the capital structure of the loans granted, with interested parties expecting an average gross IRR of 8.0 percent p.a. and accepting a median loan-to-value ratio of 70.0 percent. The dilemma is that the required interest rates can hardly be paid by properties in the core segment. Expected returns call for properties with a higher risk profile, such as value-add repositioning or project developments with pre-letting, whose project yields generate a higher interest rate on borrowed funds.

One way to achieve the required return without higher property risk is to use debt capital at fund level, so-called back leverage. The respondents are still showing significant reluctance here. Only twelve percent of those surveyed are already using back leverage, and a further three percent are planning to implement it. On the other hand, 67 percent do not intend to use it in the coming years. The main obstacle is seen as an associated increase in risk (37 percent of respondents). In addition, the market for these structures is not yet mature or corresponding standards are lacking (19 percent). In addition, the structures are too complex and require additional reporting (13 percent).

"The preference for priority structures, the current disproportionate pricing of risk and the reluctance to use leverage at fund level confirm the priority of security and portfolio resilience in investment decisions," says Markus Kreuter, COO of CAERUS Debt Investments: "However, the required return is hardly achievable with defensive portfolio financing in the current market environment. Supply and demand are currently not coming together here." As a way out, 60 percent are considering financing project developments. Another alternative could be to dispel investors' concerns in the context of back leverage through suitable structures.

On the demand side, real estate debt in Germany is thus presenting itself as a supplement to classic bank loans for the time being. "Real estate debt ideally comes into play when the property just doesn't fit into the banks' financing grid. Be it in the loan-to-value ratio, be it a transformation object that is to be repositioned in the direction of ESG if there is a letting issue or a change in the type of use," says Matthias Thomas, Business Development & Client Relationschips, CAERUS Debt Investments AG.