Alternative financing as a virtuous tool for developing the real economy

Recent macroeconomic changes, such as rising inflation and the rapid acceleration of interest rates, have put significant stress on the global real estate market, with Europe particularly affected.

The alternative financing market is thus playing an increasingly important role in the development of the real estate sector. The group most impacted by this shift is undoubtedly borrowers, who now have access to a wider range of new opportunities in order to borrow money for property development.

Let’s explore how alternative finance and real estate investment funds are supporting the entire system, fostering the development of the real economy.

ALTERNATIVE FUNDS AND FINANCING TO FOSTER BUSINESS GROWTH AND MITIGATE THE FINANCING GAP

ESMA report no. 2/2023 highlights a widespread decline in key indices related to real estate stocks and bonds, coupled with an increase in the trading and lending of securities for real estate companies. Moreover, the valuations of listed real estate companies appear to have dropped, likely due to the sector’s growing debt burden over the last five years.

While markets remain highly sensitive, particularly to potential deterioration in economic fundamentals and risks in traditional financial institutions, with a focus on the sustainability of public and private debt amidst higher interest rates, real estate alternative investment funds are emerging as a key resource. These funds have shown significant growth in recent years, signaling increasing interest in more innovative forms of financing. According to the annual Alternative Lenders report by Real Estate Capital Europe, non-bank lenders and debt funds have experienced notable growth in Europe: between 2019 and 2023, growth has been at 1.2% per annum. This trend reflects a shift in capital flows towards more flexible and alternative financing solutions in response to the challenges posed by the traditional banking system.

In this context, alternative financing becomes even more crucial for those looking to develop new real estate projects, offering a flexible and dynamic solution capable of bridging the financing gap that often hinders the completion of such projects.

ACCESS TO ALTERNATIVE CREDIT: A STRATEGIC CHOICE FOR BORROWERS

There is no doubt that alternative finance, enriched by fintech and regtech, provides faster, more flexible, and immediate access to capital compared to traditional banking channels, which are often burdened by over-bureaucratic processes and increasingly stringent creditworthiness criteria, penalizing many businesses, especially SMEs.

However, it is not only about faster access to funding: one of the most advantageous aspects for borrowers choosing alternative instruments is the ability to secure capital without having to give up shares in their company. This allows real estate entrepreneurs to maintain strategic and operational control over their projects, avoiding the dilution of equity often associated with other forms of financing.

Instead of relying solely on equity investment, which would involve significant relinquishment of ownership, the borrower can secure loans, paying interest on the borrowed capital but with the potential to generate a higher return than they would achieve by investing only their own capital. This approach enables them to retain control of the business while providing the flexibility needed to pursue ambitious projects.

Especially in a context where the indebtedness of real estate companies has risen in recent years, solutions such as direct lending and real estate crowdfunding enable borrowers to access funds without excessively burdening their balance sheets.

This provides borrowers with a valuable opportunity for growth, allowing them to undertake new projects that contribute positively to the entire system and the real economy: new construction sites, job creation, and, ultimately, urban and territorial development.