While opportunities in European high yield real estate debt remain, growing competition underscores the need for deep market expertise, a robust underwriting framework, and disciplined deal selection to identify and capture resilient value.
Read this article to understand:
- The factors driving the market and competition for capital deployment
- Where to uncover opportunities
- How to navigate headwinds and get ahead of the competition
Continuing geopolitical and macroeconomic uncertainty, coupled with volatile risk premiums, have contributed to the increasing attractiveness of private credit strategies over equity investments, with allocations to European real estate debt strategies above the long-term average for the last four years (see Figure 1).
Figure 1: Capital raising for European real estate debt strategies ($bn equivalent)
Source: Aviva Investors, Prequin, as of December 31, 2024.
Despite the tailwinds supporting capital raising, deployment has proven challenging. In the UK, commercial real estate lending volumes reached £36.3 billion in 2024 – an 11 per cent year-on-year increase. However, this follows a significant 33 per cent decline from 2022 to 2023. Lending activity was predominantly driven by refinancing, while acquisition financing accounted for approximately one-third of total volumes. This marks a notable shift from the historical range of 40-55 per cent, a trend that is also evident across other European markets.
A sustained period of modest transaction volumes and an improving credit outlook has created a surplus of debt capital actively seeking high-quality deployment opportunities leaving many lenders with significant dry powder.
State of play
Lending conditions are considered attractive now given stabilised real estate asset values. And recent interest-rate reductions by the Bank of England and the European Central Bank have improved borrowing conditions, bolstering lender confidence.
The market was historically dominated by banks, which hold 85 per cent of European real estate loans, but now non-bank lenders are increasingly filling the financing void created by punitive changes in regulations affecting bank appetite to lend on transitional and value-add investments. This gap has increasingly been bridged by debt funds, but is also now attracting insurers seeking shorter-duration, higher-yielding investments. These converging factors are intensifying competition for deployment opportunities.
A cool-headed approach remains necessary. Although the UK and Europe benefit from relative political stability, global macroeconomic and political uncertainties – US policy on tariffs, for example – continue to influence investor sentiment and cross-border capital flows. This is evident in lender appetite: a recent report from CRE Finance Council Europe, a trade association representing the commercial real estate finance industry, highlighted growing caution around logistics and hospitality. In Q2 2025, 25 per cent of respondents expressed negative sentiment on the fundamentals of the logistics sector, and 19 per cent on those of hospitality – a 20 per cent and 11 per cent increase since Q1 2025, respectively.2
For savvy investors, high yield real estate debt in Europe nevertheless offers an interesting investment opportunity, both for deployment and attractive returns. Deep market knowledge and strong research capabilities can uncover opportunities in overlooked areas. Structural flexibility is essential when originating transactions that deliver enhanced risk-adjusted returns, secured against high-quality collateral and supported by strong borrowers.
This article explores a number of opportunities that can be found today, and discusses the challenges to capital deployment and how to overcome them.
Defining the high yield opportunity
True to its name, high yield real estate debt encompasses higher-risk, higher-return strategies, typically targeting internal rates of return (IRR) of over eight per cent. These include high-leverage transactions, typically up to 75 per cent loan-to-value (LTV); exposure to leasing and construction risk; mezzanine positions (debt that ranks behind senior debt); and distressed opportunities.
Over the last year, activity has increasingly focused on construction and stretch senior lending
Over the last year, activity has increasingly focused on construction and stretch senior lending (LTVs up to 75 per cent). This is particularly in sectors with resilient fundamentals such as living and logistics. Mezzanine financing also remains prevalent in continental Europe – more so than in the UK where higher all-in rates continue to impact affordability.
These characteristics mean that, although the potential returns are compelling, the transactions are more complex, with greater risk factors than traditional core real estate debt. Effective underwriting in this space requires a deep understanding of the borrower’s business plan, rigorous stress testing and a considered approach to risk assessment. But armed with those skills, investors can find attractive opportunities to deploy capital. Figure 2, based on data from a CBRE survey, shows where European lenders are likely to focus their activity in 2025.
Figure 2: Lending intentions for 2025 – refinancing expected to be the main source of activity (per cent)
Source: Aviva Investors, CBRE, June 2025.3
According to the survey, development lending is anticipated to account for 21 per cent of total financing activity in Europe in 2025 – broadly in line with the previous year. This stability highlights continued appetite from lenders to deploy in construction finance, with borrowers looking to navigate viability challenges and advance projects.
New viable living asset classes are gaining traction, including co-living, pod hotels and retirement living
Constrained supply, contracting yields and strong forecast rental growth support ground-up developments and repurposing existing stock in certain sectors. Examples of this include the recent financing of the conversion of obsolete office space to life science by Aviva Investors.4 Additionally, new viable living asset classes are gaining traction, including co-living, pod hotels and retirement living.
High yield debt can also be deployed through deals with higher leverage and innovative structures. Higher LTVs are becoming more common as borrowers look to release capital and improve returns. Falling borrowing costs, driven by margin compression and reductions in base rates, improve debt serviceability for whole loans or mezzanine debt. Being able to differentiate terms is a key advantage and lenders are increasingly competing through creative structuring.
Examples of this include:
- Pari-passu funding (equity and debt providers fund the development in line with a pre-agreed ratio);
- Top-up facilities (a supplemental loan provided to a borrower subject to certain criteria); and
- Back leverage (where the original lender borrows from a third-party lender, typically a bank, using the loan it originated as collateral).
All of these approaches are being utilised to enhance returns while managing risk.
Navigating headwinds to deployment
These lending opportunities nevertheless face challenges:
1. Liquidity
The current market is characterised by a surplus of capital relative to borrower demand, increasing competition between lenders for each deployment opportunity.
The ability of high yield real estate debt to generate equity-like returns has prompted investment and private equity firms to raise substantial capital for credit-focused strategies. At the same time, LTV ratios remain relatively conservative by historical standards, reflecting both a cautious borrower appetite and tighter affordability constraints.
2. Viability
Construction opportunities remain attractive from a lender’s perspective; however, developers continue to face viability challenges due to elevated construction costs and broader market pressures.
- In the living sector, regulatory uncertainty – particularly surrounding the Building Safety Act in the UK and uncertainty due to rent control legislation – is disrupting the development pipeline.
- In the logistics sector, a softer leasing environment is dampening growth prospects.
- In the office sector, sentiment is improving in select locations, but the viability of many schemes still hinge on securing pre-let agreements.
Figure 3 shows the distribution of incoming construction-financed deals requiring finance over the past year. Despite ongoing activity, sector-specific headwinds continue to constrain overall development momentum.
Figure 3: Incoming deals by sector, H2 2024 – H1 2025 (per cent)
Note: Data shown for July 1, 2024 to June 30, 2025.
Source: Aviva Investors. Data as of June 30, 2025.
3. Returns
The increased use of back leverage and growing appetite from the banking sector have contributed to spread compression across both core (LTV below 55 per cent) and stretch senior lending opportunities (LTVs up to 75 per cent). This dynamic is also exerting downward pressure on pricing for construction and mezzanine loans.
Geographic diversification can provide a strategic advantage for higher yielding approaches
Mitigating solutions are available. Geographic diversification, for example through pan-European investment strategies, can provide a strategic advantage for higher yielding approaches, particularly where identifying market dislocations is central to value creation.
Beyond expanding the opportunity set, geographical diversification reduces exposure to localised economic, regulatory and climate-related risks. It can also enhance returns, by enabling investors to target higher yielding opportunities in less competitive or inefficient markets. And it can smooth portfolio performance by balancing exposure across markets at different stages of the economic cycle.
The European debt market remains much more bank-dominated than the UK or the US, suggesting that there is greater opportunity for alternative lenders to provide more flexible solutions in areas where banks are less willing to provide capital (for example, construction with higher loan-to-costs or emerging asset classes).
But beating the competition to seize deployment opportunities also takes specialist skill set.
Finding a competitive edge
Aviva Investors has been active in the real estate debt market for over 40 years, during which we have developed long-term sponsor relationships, giving direct access to deployment opportunities. An in-house private markets research team and direct real estate investment capability also help us to identify market opportunities and assess risk-reward profiles.
Our in-house expertise across the full capital spectrum supports high yield as a long-term strategic allocation
Flexible thinking and creative structuring increase the likelihood of successful capital deployment, enhance return potential, and strengthen risk management. It is these critical in-house factors and expertise across the full capital spectrum that support high yield as a long-term strategic allocation rather than a cyclical opportunity.
Selectivity remains paramount in this space. Our origination team brings extensive experience across real estate and credit cycles, and maintains a disciplined approach to underwriting and risk management, even in the most challenging market environments.
Competition for opportunities to deploy capital productively in European real estate debt is intense. We believe investors with established sponsor relationships, deep market insight, structural agility and a refined ability to assess risk-adjusted returns are well-positioned to lead in today’s competitive landscape.
