They say that wealth is neither created nor destroyed but merely transferred. Could the same be said of risk? Not necessarily true on either count, however it can be reduced and managed – in the evolving landscape of European mid-market real estate, funding via private credit is shifting the status quo, creating investment opportunities with hugely favourable risk/return profiles.
The core of the matter is that there is a significant funding void between large institutional projects and small-scale developments across Northern Europe. In this space also exist impressive yields and, if funded suitably, significant scalability, attracting the interest of private credit investors. Further, along with curbed access to Tier One funding, another primary limitation is access to curated asset-backed opportunities.
This is changing.
The European mid-market landscape
As we all know by now, emerging in the aftermath of the 2008 financial crisis (Basel III will be fully implemented in early 2025) the Basel Framework is a means of reducing the systemic risk in the banking system.
Increased capital requirements for international banks, the introduction of enhanced risk-based lending weightings, and a requirement for greater liquidity cover continues to drive a de-risking of traditional banking portfolios. One consequence is a mid-market real estate sector (€10 million-€ 50 million) starved of much-needed funding, leading to enhanced returns for those willing to provide the capital, and sponsors of exceptional opportunities searching for that capital.
Key areas in European mid-market real estate
While demand for French and UK real estate development remains relatively strong, there is growing interest in German and Scandinavian real estate.
Scandinavia
Scandinavia offers a stable economic environment with strong institutional frameworks. Ambitious climate goals and ESG-focused investments drive high demand for sustainable, energy-efficient properties. However, despite challenges like high construction costs and regulatory hurdles, there are significant opportunities for private credit investors.
Areas such as residential, logistics, and renewable energy-aligned real estate are thriving, with Stockholm, Copenhagen, and Oslo standing out as key investment hubs offering stable yields. As funding gaps continue to emerge, private credit investors are well placed to take advantage.
Germany
Germany’s commercial real estate market is showing early signs of stabilisation, with transaction volumes increasing by 5% year-on-year and a modest 0.7% price rise in Q3 2024. However, prices remain 4.7% lower than the previous year, reflecting both the lingering impact of what many consider the worst real estate crisis in decades, and a capital growth opportunity.
This led to traditional bank financing tightening, creating a growing reliance on private credit to meet funding needs. The sector faces continued short-term uncertainty, driven by reduced economic growth expectations for 2025 and potential geopolitical risks.
We expect an amplification of demand for private credit solutions to support recovery and investment opportunities.
If we look a little further afield, there are interesting emerging hubs, away from Emerald Peak’s core markets, in other areas of Europe, including:-
The Netherlands
The Netherlands’ real estate sector is recovering, with investment volumes up 44% in early 2024 compared to 2023. Logistics and industrial assets dominate, while office spaces and ESG-focused projects are gaining traction. In the residential sector, housing shortages present opportunities for those with a long-term mindset.
Major cities like Amsterdam and Rotterdam lead the way, but hubs like Eindhoven and Venlo are drawing interest. The upcoming 2025 real estate transfer tax may pose challenges, but private credit activity is rising as asset values are rebased to more realistic levels. Despite economic and geopolitical hurdles, the market has stabilised, but the recovery will likely be gradual.
Portugal
Portugal’s stable political climate, business-friendly policies, and competitive real estate values make it a prime market for mid-market investments. A thriving tech sector is driving demand for housing and office space, creating supply shortages in cities like Lisbon and Porto. This environment supports private credit funded developments, while government-backed green initiatives and energy efficiency policies attract ESG-focused investors to sustainable projects.
Growth drivers in the short to medium-term
While London and Paris have experienced volatility regarding mid-range real estate investment, there is growing interest in the urbanisation of secondary cities right across Northern Europe. Coupled with increasing demand for niche real estate, such as logistic hubs, co-living spaces, and green-certified properties, more exciting opportunities are emerging.
The identification of those opportunities is nuanced, requiring local connection and deep experience. Once the right partner is secured, however, this opens up the possibility of returns consistently above traditional opportunities in European real estate.
Overview of the mid-market real estate sector
Even though we are seeing the emergence of attractive propositions in the mid-market sector, there is still limited competition in this segment compared to industrial-grade assets. There are several reasons for this:-
- Relatively modest capital requirements
- Lack of trophy assets in this segment
- Risk-averse nature of institutional investors
- Requirement for more hands-on management
- Liquidity risk, especially in less central locations
- Comparatively low market information versus prominent markets and sectors
On the flip side, private credit investors are taking advantage of limited competition to increase their exposure to:-
- Higher yield assets
- Diverse asset pools
- Deep value opportunities
- Flexible deal structures
- Strong demand in emerging hotspots
High-net-worth individuals, family offices, boutique private debt firms, and smaller syndicates are filling this void well.
Pain points in accessing mid-market opportunities
When looking at real estate in Europe, it’s essential to address the pain points which put this segment out of reach for smaller investors and often too risky for institutional clients.
Limited transparency and market inefficiencies
Information is the currency of investment, but mid-market property opportunities often lack centralised listing platforms or in-depth data. In what quickly becomes a chicken and egg saga, what comes first: increased investment leading to more in-depth data or investment in centralised listing platforms and data analytics before a realistic audience has emerged?
High barriers to entry for investors
As private credit mid-market real estate investment specialists, we have access to local underwriting facilities and knowledge of legal frameworks and local market nuances. We know from experience that investors find it challenging to source deals at scale without access to regional networks. Here, the barriers to entry are less due to financial resources and much more down to knowledge and financing structure.
Regulatory challenges
It’s no secret that the regulatory changes post-2008 have helped to create this challenging void in the mid-market sector, but there are other regulatory complications. ESG is becoming a critical element of broader property development and influencing access to property finance. Those acting on behalf of investors are often now obliged to ensure third parties are delivering on their ESG liabilities, both ethical and legal obligations.
The investment opportunity: High yields and risk mitigation
If we look at the correlation between yield and risk, by traditional measures, the European mid-market real estate sector seems out of sync. While the yield spread over institutional-grade assets will reduce over time as private credit and other forms of funding fill the void, it’s also important to consider the relatively low volatility of this area. This is due to the focus on fundamental housing and commercial logistics drivers.
Physical collateral in private credit funded real estate is being used to mitigate potential risk, adding a secure backbone to finance arrangements. Recently, we have seen numerous examples of this across urban residential development and mixed-use commercial assets, releasing critical capital for investment.
When it comes to asset diversification, investment in European mid-market real estate offers a valuable counterbalance between – and an alternative to – equities and public fixed-income markets. There is still a need to be selective about investment opportunities, but there is also the opportunity to secure a significant risk premium and genuine diversification.
The role of expert sourcing and management
As with any type of investment, especially those where there is a perceived lack of depth in available finance and research, the sourcing and management of assets are critical. We are not suggesting there is no risk, but there are certainly some interesting opportunities when it comes to the risk/reward ratio due to the void in available finance.
A specialist in mid-market European real estate, we provide:-
- Expertise in sourcing, underwriting and monitoring projects
- Localised networks for a competitive edge
- Rigorous due diligence to identify undervalued assets
- Active monitoring for ongoing risk control and yield optimisation
ESG, sustainable investment and the future of mid-market real estate
It is fair to say that ESG is impacting all areas of investment and finance, with rising demand for sustainable buildings and a societal focus on affordable housing and urban revitalisation. Emerald Peak is committed to responsible investing, aligning our strategies with ethical practices to ensure long-term value creation and market stability.
Tentatively, we are seeing more investment finance delivered through an ESG lens, placing the onus on companies to create formal policies in this area. However, this comes with its own challenges, with greenwashing a growing problem for companies and investors. Ongoing regulatory changes are set to address these issues, creating a unique position for mid-market real estate to utilise this move towards ESG finance and investment.
There are various elements of the mid-market real estate sector which will benefit from the ESG transformation, such as:-
- Renovating existing stock
- Enhancing energy efficiency
- Focus on community-orientated developments
Looking at ESG in a broader context, new sectors and assets will become more attractive to institutional investors as this becomes an integral part of finance and investment. The size of deals in the mid-market real estate sector is still an issue, but a broader fund that looks at numerous investments in this area could be an ideal way to attract more institutional investment.
Why now?
If we look at the Far East, particularly the APAC region, private credit has recently seen significant growth. Within the European market, where the retrenchment of traditional banking has created structural inefficiencies, we feel demand in this area is set to outpace supply.
Changing outlook for finance costs
While interest rates may have peaked, the global trade balance will face a seismic shift if incoming president Donald Trump follows through with his promise of enhanced tariffs. Economic policies that could fuel inflation in the short term will likely extend the ongoing downtrend in interest rates. The economic knock-on effect of higher interest rates for longer is obvious, enhancing potential risk and reducing potential rewards.
Higher finance costs will likely cause institutions to take an even more cautious approach to mid-market real estate in the short term. However, this will create more gaps for private debt across the European market. Strategic use of real estate collateral will limit market exposure for private debt investors and add a degree of backbone to what is, for many, an uncertain but under-researched market.
In summary, the main highlights are as follows:-
- Traditional lenders are reducing their presence and exposure to commercial real estate, leading to a funding gap.
- As demand for finance continues to rise, together with an estimated $2 trillion of loans set to mature, the need for refinancing solutions has increased.
- Reduced traditional lending and increased demand have created a lenders market, leading to higher spreads and total yields for real estate private credit investors.
- Elevated finance costs have created an attractive entry point with new loans structured against reset real estate valuations, providing enhanced headroom.
- As a consequence of its low correlation with other asset classes, private credit real estate investment offers an attractive source of diversification for investors.
In summary, the shift to private credit is driven by traditional lenders being constrained by stringent regulatory changes, with no signs of easing in the near future, due to a perfect storm of economic circumstances.
Mind the gap
The European mid-market real estate sector stands at a crossroads, with cautious institutions creating fertile ground for agile private investors to seize opportunities. With strategic foresight and a focus on valuable, high-yield assets, private credit can bridge the financing gaps, transforming market inefficiencies into avenues of growth stability in this evolving landscape.
Conclusion
As Europe’s mid-market real estate sector evolves, it offers a unique blend of opportunity and transformation. Structural inefficiencies, cautious institutional players, and rising demand have created a rich landscape for innovative approaches to investment.
By leveraging expertise, and flexible funding, private credit investors can unlock the untapped potential of this often-overlooked sector.
At Emerald Peak, we work closely with investors and sponsors alike to navigate this dynamic environment with precision and insight, helping to transform today’s unseen opportunities into tomorrow’s lasting value.
