The inexorable rise of private credit in real estate seems unstoppable, if the latest predictions are correct. A forecast from alternative assets data specialist Preqin suggests that globally, private debt assets under management are expected to reach $2.64 trillion by 2029, from $1.50 trillion in 2023, while returns are expected to rise further – reaching 12 percent over 2023-2029 following a previous period at an average of 8 percent.
A quick glance at the corporate landscape supports these metrics, with debt advisories and credit strategies proliferating in major markets to both provide that financing and benefit from its bottom line.
Private credit growth
“Private credit has grown so much because lenders in the space can act quickly, closing in a month, while banks take 4-5 months and will shy away from loan-to-values (LTVs) much over 50 percent,” says Timothy Alexander, co-founder of a newly launched debt advisory firm, Jackson Square Partners. Alexander, who previously led Sound Point Capital’s European operations, after building out UBS’s European loans and distress-focused business, says that he has had experience on both sides of the table, “as a lender but also as a borrower”.
The firm has launched offices in London and New York amid “structural changes to the lending market combined with heightened uncertainty over the future rate path” on both sides of the pond, he says. Add in the wave of refinancings set to hit the industry this year, and there is plenty to do.
Alexander says that hospitality assets remain attractive to lenders, as long as certain conditions can be fulfilled. “We would look at country, sub-location, asset and then what is happening to that asset, if demand is peaking or not,” he says. “Room rates have soared by 50-100 percent in most markets in the last five years, but in some cases, demand has also peaked. For these properties it may be that RevPAR will have to come down to achieve healthy occupancy figures going forward.”
He also highlights a degree of naivety about the refinancing terms that hotel owners can now expect to be offered. “You might have a hotel owner who was financed five years ago at a near-zero rate. SONIA swap rates are over 4 percent, so refinancing terms are unlikely to be less than 7 percent,” he adds.
Distress and downturn
The rise of private credit globally is an interesting story driven in part by distress and downturn. After the global financial crisis (GFC) of 2007-2008, non-bank lenders proliferated in real estate as banks retreated, with private credit vehicles appearing in Europe for the first time and expanding in the more mature US market. “Post-GFC, the CMBS markets ground to a halt, with private credit funds and mortgage REITs being raised at an incredible pace to fill that void,” notes Cody Bradshaw, Group CEO of L+R Hotels, part of a group deploying both credit and equity strategies in real estate.
However, the private credit outlook is a little different this time round, not least due to the lack of real distress present in the markets, despite some recessionary markers. “The difference now is that CMBS markets have come roaring back in the US, and spreads have tightened much faster than people expected. In Europe, there has been no need to set up bad banks to deal with soured loans, so domestic lenders have remained quite active.” Bradshaw warns that the margins look tighter all round this time. “You need to be creative in the private credit space, because there isn’t a huge void in the capital stack or on balance sheets,” he says. “The majority of the private credit funds that were raised have found that, in order to be efficient with their resources and their capital, they need to target the larger situations in hospitality. They have had quite a bit of success across larger platforms with greater capex risk.” The L+R Group credit strategy has also had some success in targeting financing niches, he notes. “A lot of private credit funds have a minimum ticket size, say $100 million upwards. Lower than that is too small for the CMBS market and the larger private credit funds and often too complicated for domestic banks to underwrite. So, we have found ourselves quite competitive in that sub-$100 million space, in both Europe and the US.”
Some of Bradshaw’s concerns reflect issues flagged by a recent EY whitepaper on the outlook for the private credit space. That research warns that “the double effect of, on one hand, new originations at lower spread and, on the other hand, the backlash of the mechanisms put in place during high rates period to relieve borrowers, might affect yields on overall portfolios in the future”.
Risk appeal
Despite the market’s complexities, capital is likely to continue flowing towards credit, as direct real estate strategies seek direction in 2025’s complex first quarter. Amid geopolitical shocks and a mix of inflationary drivers and sluggish growth, credit’s risk profile still appeals. Last year, a wholly owned subsidiary of the Abu Dhabi Investment Authority (ADIA) expanded its commitments to a Cheyne Capital credit strategy to £650 million. The ninth vintage of the Cheyne Real Estate Credit Holdings (CRECH) programme is asset class agnostic, but its firepower has backed hotel deals, including providing a tranche of over €200 million to the Beaumier hotel group for its lifestyle portfolio across France, Switzerland and Spain.
Chris Brett, head of capital markets Europe at CBRE, notes that major investors like sovereign wealth funds like to have the credit option. “The big LP investors used to have a relatively narrow menu as to where they could put their capital. Ten years ago, credit wasn’t available at scale, but it is now.” He adds: “A sovereign that sought an open-ended core-type fund in the past can instead choose exposure to the debt of the same type, which is attractive.” Furthermore, “the number of alternative lenders that have raised money focused on real estate credit strategies is so large it will continue to be deployed.”