Higher rates, constrained capital and supply-side pressures have reset European real estate valuations – creating a rare opening for opportunistic credit investors, argues Carlos Colomer
European real estate has undergone a reset in recent years. Higher interest rates and reduced liquidity have driven a sharp correction in valuations. Elevated construction and financing costs have made new development uneconomical across large parts of the market. An increased regulatory burden and longer permitting timelines have stunted new supply.
The market is now showing signs of stabilisation, but capital remains scarce. Many traditional real estate investors are constrained by legacy portfolio issues, limited distributions and recent underperformance. This has created a feedback loop: weaker fundraising reduces transaction liquidity, making it harder for funds to realise investments and return capital to their investors.
At the same time, a substantial volume of debt originated during the low interest-rate period prior to 2022 needs to be refinanced under very different conditions. The financing gap is exacerbated by bank retrenchment and regulatory changes that have reduced the availability of capital, particularly for development and higher loan-to-value structures.
For opportunistic credit investors, this combination of repricing, capital scarcity and structural change is producing an unusually broad opportunity set within real estate equity and credit. We find particularly attractive risk-adjusted reward in core and core-plus assets: stabilised, well-invested, income-producing properties where the majority of the return comes from contractual cash flow as opposed to requiring a broad recovery in property values or operationally intensive business plans.
Key drivers of the opportunity set
Two major drivers are currently allowing credit investors to invest in real estate assets at compelling valuations. The first is asset mispricing driven by technical, not fundamental, factors. Extended hold periods and fund lifecycle pressures have forced traditional real estate managers to consider disposals, recapitalisations or alternative financing solutions. These decisions are often driven by the need to generate distributions or resolve approaching debt maturities. This can create opportunity to access high-quality assets at rebased valuations and attractive yields, without relying on ‘fixing’ an asset or yield compression to generate returns.
The second driver is how supply-demand fundamentals favour selected assets. The correction in values has taken place alongside a significant increase in replacement costs. Construction cost inflation, higher financing rates and more demanding regulation have increased the economic hurdle for development and stunted new construction across a range of European markets driving rental tension where demand has remained resilient.
How real estate complements opportunistic credit portfolios
Contractual cash flows, tangible asset backing and often inflation-linked rents are characteristics in real estate that enhance portfolio income and downside protection while adding diversification to opportunistic credit portfolios. The diversification benefit is driven by property performance shaped by asset-level income, local supply-and-demand dynamics and the quality of the physical asset, rather than corporate earnings or broader credit market conditions.
Additionally, real estate and corporate credit have distinct investor bases. This can lead to dispersion in fundraising cycles and liquidity conditions, which can influence pricing and create relative value opportunities over time.
Executing on the opportunity
Accessing this opportunity requires local presence, specialist underwriting and asset management capabilities. Allocators should prioritise managers with these attributes, a robust sourcing platform and the ability to assess relative value across a broad opportunity set, to deliver consistent returns across cycles.
For opportunistic credit investors with the ability to move across the capital structure, we believe European real estate expands the investable universe while offering an attractive risk-reward profile. In our view it provides differentiated exposure that can diversify a broader portfolio, together with credit-like characteristics such as current income, tangible asset backing and meaningful downside protection.
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