Real estate debt: different levels of diversification (Roundtable 'Real Estate Debt' – part 2)

November 26, 2025

^{This report was originally written in Dutch. This is an English translation.}

In part 2 of this roundtable discussion, the experts discuss how regulation is changing the behaviour of banks, why private lenders are gaining ground, and how diversification, deal structures and mezzanine financing can radically reshape the capital structure of real estate loans. The rise of back leverage is also discussed.

By Hans Amesz

This is part 2 of the report. You can read part 1 here, part 3 will be published on Friday 30 November.

To what extent do regulatory capital requirements, such as Basel III and Solvency II, influence the behaviour of banks vis-à-vis private lenders in real estate financing?

Gordon: ‘It is difficult to demonstrate that banks are reducing their total exposure to real estate debt. Banks may be reducing their direct exposure, but they are increasing their provisions for underlying leverage. This indirect exposure to real estate is difficult to quantify. What I see is that the market is polarising to a certain extent in terms of the availability and pricing of debt. Large deals, top sponsors and certain asset classes are very attractive to many lenders. Smaller deals, smaller sponsors and less attractive regions are less appealing. It is much more difficult for borrowers to obtain loans at favourable rates.’

Ibrahim: ‘I agree. I think that polarisation is not so much competition, but rather that parties are simply operating in the areas that work for them. Banks and insurers are focusing more on core assets, while private lenders can be more flexible and agile. In a sense, there is almost a partnership, with everyone seeking their own place in the market, because the capital projects that need to be tackled are significant in terms of loans. I think private lenders have broader opportunities, that technically they can still operate from core to opportunistic.’

De Laurentiis: ‘The banks have moved from an 'originate and hold” model to “originate and sell”, which ultimately limits what they can keep on their balance sheets. Parties such as ourselves are not restricted by this. The other point is that, without increasing the risk curve, we can differentiate ourselves through our real estate activities. Banks have traditionally focused on offices and shops, but we can offer the expertise to finance more operational activities, such as Student Life Science, data centres, and so on. I think banks are dropping out because it is too expensive for them. For us, it is a way to gain access to the new generation of the best assets.’

Janssen: ‘It's about efficient capital allocation. Banks do what they are good at and what their regulatory constraints and risk frameworks allow them to do, and alternative credit providers do what works for them and their investors. I don't necessarily see that as competition. It's not just about price, but also about speed of execution, flexibility, covenants, multiple currencies or multiple jurisdictions, that sort of thing.’
 

Managers with experience in structuring and creative solutions can potentially extract more value from investments.

 
Nobel: ‘A concise version of portfolio theory is that diversification is good and more diversification is better. I don't think that applies to real assets. You have to reach a level where you are efficiently diversified and take positions in assets and sectors that appeal to you. That's easier for us because we're not as systemic providers of capital as banks are. But you can also diversify too much.’

Bruijn: ‘When it comes to diversification, I think it also depends on how often a loan defaults. If it is a large loan, it will affect the overall return. Even if you successfully resolve the issue, it is difficult to recover all your costs, which slows down your return. You don't have that problem in a more diversified portfolio consisting of mostly relatively smaller loans.’

Gordon: ‘Portfolio diversification can help limit the impact of a failed loan on the total return. But if the failed loan involves many assets in many different countries, the manager will be dealing with it forever. There are different levels of diversification.’

De Laurentiis: ‘We would never advocate funds that focus on a single jurisdiction or asset class, because at some point you will find yourself at the wrong moment in the cycle. It comes down to real estate expertise and knowledge of the cycle, but you need a certain balance in the portfolio.’

What can you say about deal structures?

Nobel: ‘I think all these loans are generally non-recourse, meaning that in the event of default, the lender can only recover from the collateral and not from the sponsor's other assets. Our starting point is that we provide a loan under certain conditions and if the conditions are not met, or the assumptions are no longer correct, there may come a time when you can intervene.’

Gordon: ‘In the United States, there are usually non-recourse carve-outs. Then you have guarantees from a financially substantial entity, which to a certain extent mitigates the fact that you have a limited set of covenants. The risk we need to be aware of is that large international financial sponsors can pick and choose the parts of the European and American structures that suit them best.’

Janssen: ‘The beauty of private debt is that it can meet the business needs of the sponsor. There is a whole range of options, and sometimes a single lender can offer the borrower two or three different options. This has enabled enormous creativity in the market to meet the needs of borrowers, but sometimes also to address the risks in the structure that the borrower sees. If investors want stable income and protection against downside risks, they will generally engage in senior lending.’

De Laurentiis: ‘What can set us apart from the bank is our expertise in real estate. Banks rely on third-party reports, which means you are twelve months behind reality. If you are on the ground, you have an idea of what is happening in terms of values, and if you can also read the property cycle, that helps.’

How do you see the role of mezzanine financing and preference shares evolving in the current capital structure?

Bruijn: ‘Mezzanine financing was developed after the global financial crisis, particularly in Europe. Because it was a relatively new product, over the years more knowledge has been gained about how to structure this type of financing so that you can better manage the risks of a mezzanine position. In addition, there is now a better understanding of the risks compared to equity and senior positions and, with that in mind, what the correct pricing is for mezzanine credit. An interesting lesson learned in mezzanine credit is that in some cases, equity was better off than the mezzanine credit provider, because the senior needs the equity or the borrower to complete the project. When a project is underwater, mezzanine no longer adds value and people would rather see it disappear. A wait-and-see approach often does not work for mezzanine, because it is pushed out of the stack by rising senior interest rates, increasing costs and delays, so that you get further and further out of the structure. No market recovery can counteract that.’
 

What investors value is conviction. A fund manager must also tell you when not to invest.

 
Janssen: ‘The challenge with mezzanine is that you have much less recourse than with senior debt, but you can be compensated for the risk taken by the higher returns generated. It can be an important instrument. Lenders must be selective. And that comes down to the underlying sponsor performance and the underlying asset forecasts.’

De Laurentiis: ‘The most important thing is risk control. Control has two dimensions. First, voting rights: you have to negotiate with both the board of directors and, possibly, a syndicate. Second, you need real estate expertise, because the point is that it is not necessary to buy out the senior, as this rarely makes economic sense.’

What is the impact of back leverage on the European real estate debt market?

Gordon: ‘The availability of back leverage has led to fierce competition in certain parts of the market, resulting in tighter margins. It is a relatively new phenomenon in Europe and seems to be replacing much of what used to be mezzanine, but it carries risks that are perhaps less well understood than mezzanine risks.’

Ibrahim: ‘We have not yet seen any interest from European clients in the American back leverage product.’

De Laurentiis: ‘What will happen if regulations in the United States change tomorrow and American banks no longer receive favourable treatment for leverage?’

Janssen: ‘Back leverage is not free, of course. You have to inform investors about the risk, because they are being offered senior funds with back leverage, not mezzanine funds. Back leverage is less mature in Europe than in the United States, where leverage levels are considerably higher. In Europe, few managers apply four times leverage. There, it is generally limited to one or one and a half times leverage.’

Gordon: ‘The market is developing. There is room for European funds to catch up with the United States.’