Real Estate Debt

Why invest in Real Estate Debt

• Stable and predictable income – Consistent cash flow from interest payments.
• Diversification benefits – Exposure across property types and geographies.
• Capital preservation & downside protection – Secured by tangible assets with strong collateral.
• Attractive risk-return profile – Competitive yields (5–10%) vs. traditional fixed income.
• Market opportunity & growing demand – Banks’ retreat creates new private lending opportunities.

What are the main risks of Real Estate Debt

• Credit risk – Borrower defaults can impact returns.
• Market risk – Property values fluctuate with economic cycles.
• Liquidity risk – Real estate debt is less liquid than public fixed income.
• Interest rate risk – Rising rates can affect loan pricing and refinancing.
• Regulatory risk – Changing policies can impact lending conditions.

What characterizes Real Estate Debt?

• Industry/Sector – Provides financing across commercial and residential real estate, including office, retail, industrial, multifamily, hospitality, and senior living properties. The demand for real estate debt is driven by investors seeking stable income and borrowers requiring flexible financing solutions.

• Instruments – Includes a range of debt structures such as senior mortgages, mezzanine loans, bridge loans, and preferred equity. Senior loans are typically secured by the property, while mezzanine and bridge loans offer higher returns in exchange for increased risk.

• Maturity Profile – Loan terms typically range from 3 to 10 years, with shorter durations for bridge and transitional financing and longer terms for stabilized properties. Some structures include extension options based on performance metrics.

• Credit Quality – Assessed based on loan-to-value (LTV) ratios, debt service coverage ratios (DSCR), and borrower financial strength. High-quality borrowers with stabilized assets secure lower-cost financing, while transitional or distressed properties require specialized lending solutions.

• Interest Rate Risk – Real estate debt is often structured with floating interest rates, which mitigates duration risk but increases sensitivity to rate hikes. Fixed-rate loans are also available, particularly for long-term financing of stabilized assets.

• Borrower Size – Borrowers range from small developers and private investors seeking capital for value-add projects to institutional real estate firms, private equity funds, REITs, and corporate property owners financing large-scale acquisitions and refinancing.

• Return Profile – Yields vary by loan type, typically ranging from 5–10% for senior loans and higher returns (10%+) for mezzanine and bridge loans. Risk-adjusted returns are attractive compared to traditional fixed-income assets.

• ESG – Increasing focus on sustainable development, green building certifications (e.g., LEED, BREEAM), and energy efficiency standards. Many lenders now integrate ESG considerations into underwriting, with some offering favorable terms for environmentally friendly projects.

Question 1: What is driving the evolution of the opportunity set in Real Estate debt?

Cheyne Capital

European real estate is in desperate need for financing for the retention, CAPEX, and development of productive assets.

Significant changes to the structural need for real estate are being driven by:

• - Changes to the way we live, work, consume, produce and rest
• - De-globalisation
• - Obsolete assets which were previously held up by a zero-interest rate environment which now require creative destruction.

With banks retrenching due to regulatory constraints (Basel 3.1), and the high barriers to entry for alternative lenders, competition is low in the European real estate debt market. Despite their size, most US funds do not have the required footprint and origination relationships required for successful origination in Europe.

Real estate debt offers attractive features, including strong covenants and security with superior risk-adjusted returns compared to public and private corporate debt. Yields are sticky in European real estate debt (as evidenced by post-2021 returns) due to dearth of competition and high barriers to entry.

Affinius Capital

• - CRE Debt as a general matter is gaining in attraction as an CRE Equity substitute with less volatility

• - Changes in Risk based capital rules (BASEL III) for commercial banks, is driving changes in the competitive structure of the market where banks can now more profitably lend to non-banks instead of directly; the effect is to create significant space for non-bank lenders in Europe for the first time

• - The development of the lending infrastructure by non-banks is increasing the quality of service and flexibility they can offer, including construction lending

Question 2: Why senior real estate lending in an increasingly volatile world?

Affinius

• - With coupon payments and a margin of protection afforded by the equity cushion, CRE loans offers reduced volatility vis-à-vis equities and back-ended opportunistic strategies
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• - Low correlations with certain other asset classes improves portfolio diversity and reduces overall volatility

Cheyne Capital

We believe senior secured loans provide for the highest conviction risk-adjusted returns. This is where we can have greater control and governance, and lower risk, while still providing attractive returns.

Question 3: How is the changing geopolitical order reshaping risks and opportunities in the real estate credit market?

Cheyne Capital

The recent changes in the geo-political environment is likely to shift the opportunity squarely to Europe. The Trump regime policies are highly inflationary, and we are already seeing evidence that US rates will remain higher for longer. This will be very negative for US real estate valuations, as higher rates result in lower valuations. Furthermore, there has been a clear indication from the White House that there will be deregulation in US banking, giving US banks greater ability to move back into the debt markets creating a tighter, more competitive market for Real Estate.

In contrast, Europe is seeing fast declining inflation, which seems to be leading to a rate cut cycle in Europe. This is very supportive of European real estate. Competition remains relatively limited (compared to the US) and the implementation of Basel 3.1 is expected to limit European banks even further in the debt markets, creating good opportunity for debt funds.

Affinius

• - More focus on supply chains
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• - Increase scrutiny in construction inputs costs, including the impact of tariffs.