European banks are inclined to increase their loans assigned to the real estate sector by four out of every five institutions.
Non-bank lenders, such as investment funds, insurance companies, and private equity firms, have become a significant force in European real estate finance, particularly in Germany. This shift is driven by a variety of structural and strategic factors, as traditional banks pull back from the sector.
Factors Driving Non-Bank Lending in Real Estate
Traditional Bank Retreat
German banks have tightened their credit standards significantly in the commercial real estate sector over the past six months. This tightening is due to concerns over loan quality and elevated non-performing loan (NPL) ratios, as well as increased regulatory constraints and risk-weighting rules. Post-Global Financial Crisis and recent market stresses, banks have become more risk-averse, especially in segments perceived as cyclical or vulnerable to macro shocks.
Non-Bank Advantages
Non-banks enjoy several advantages that make them more attractive lenders in the real estate sector. They are not bound by the same regulatory constraints as traditional banks, allowing them to structure deals with more flexibility in terms of collateral, covenants, and risk-sharing mechanisms. With access to patient capital, non-banks can absorb higher risk, including lending to smaller developers, value-add projects, or in markets where banks have retreated. In a low-interest-rate environment, even with recent hikes, real estate assets—especially in core German cities—still offer attractive risk-adjusted yields for yield-hungry investors.
Market and Structural Drivers
Germany faces a persistent housing shortage, especially in urban centers. Non-banks can step in to finance projects where traditional lenders are unwilling or unable, responding to strong underlying demand. Urbanization and a growing international student population create demand for specialized residential products like micro-living and student housing, which non-banks are targeting. Some non-banks specialize in niche sectors, such as purpose-built student accommodation or micro-living, leveraging operational expertise and innovative underwriting models that banks may lack.
Factors Influencing Non-Bank Lending Decisions
Non-banks closely scrutinize the cash flow-generating potential of properties and the quality of underlying collateral. Experience and track record of developers and sponsors are critical, especially for value-add or development projects. Non-banks prefer assets in liquid markets where exit options are more reliable.
The regulatory and macro environment, interest rates, climate and sustainability risks, and legal and tax environment all influence non-bank appetite for real estate lending. Some non-banks focus on long-term, stable income, while others may target higher returns through repositioning or development.
Key Differences Between Banks and Non-Banks in Real Estate Lending
| Factor | Traditional Banks | Non-Banks | |---------------------------|------------------------------------------|--------------------------------------------------------------| | Regulatory Constraints | High (Basel III/IV, etc.) | Lower (varies by type) | | Risk Appetite | Conservative, especially post-crisis | Higher, especially for value-add and development | | Lending Focus | Prime, stabilized assets | Niche, value-add, development, and transitional assets | | Flexibility | Limited by regulation | High (custom structures, faster execution) | | Yield Requirements | Lower (funded by deposits) | Higher (funded by institutional capital, seeking yield) | | Market Niche | Broad, but retreating from riskier deals | Filling gaps left by banks, especially in specialized sectors|
Conclusion
Non-banks in Europe, particularly in Germany, are more willing to lend in real estate compared to traditional banks. This willingness is due to fewer regulatory constraints, higher risk tolerance, and the ability to capitalize on strong market fundamentals such as urban housing shortages and demographic trends. As banks continue to tighten credit standards, especially in commercial real estate, non-banks are stepping in to meet demand, particularly in specialized segments where they can leverage expertise and flexibility.
The loan-to-value (LTV) ratio for residential properties in Germany ranges from 60 to 65%. The CBRE survey, conducted shortly before "Liberation Day," predicts a necessary refinancing volume of approximately 70 billion euros by 2025 in Europe. Around two-thirds of financiers see geopolitical events as the greatest risk to the European and German financing market. Nearly half of the respondents in Europe only grant loans if sustainability criteria are met, with almost 60% in Germany adhering to this policy.
Modest growth in new business is expected by some large German real estate financiers, with Helaba aiming to nearly double its new business this year. The majority of credit demand in Germany and among providers operating in Germany serves refinancing, accounting for 69% compared to 56% among all respondents. In the logistics sector, non-banks are willing to take on more risk with an LTV of 60%, while banks are at 55%. Helaba plans to increase new business for 2026, while Aareal Bank anticipates a slightly lower level of lending, albeit from a significantly higher base than Helaba.
However, the specific details of the Börsen-Zeitung survey of four large German real estate financiers were not provided, resulting in an unclear picture of the market. CBRE predicts a trend towards large loans among German providers will stimulate the transaction market. Residential properties lead in terms of property types preferred for financing, followed closely by student housing, industrial and logistics properties, offices, data centers, and retail.
Investing in the real estate sector through non-bank lenders, such as insurance companies and private equity firms, is becoming increasingly popular in Germany, as traditional banks pull back from the sector. This shift is driven by several advantages that non-banks enjoy, including lower regulatory constraints, higher risk tolerance, and the ability to structure deals with more flexibility.
Non-banks closely scrutinize the cash flow-generating potential of properties and the quality of underlying collateral, preferring assets in liquid markets where exit options are more reliable. They also focus on the experience and track record of developers and sponsors, particularly for value-add or development projects.
