Firm foundations: Private credit and the transformation of European real estate

June 11, 2025

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As Europe accelerates its push toward a low-carbon economy, private credit could become a key enabler of real estate transformation. Maurizio Cavaglià, managing director for private markets at Muzinich & Co, explains why the opportunity could be bigger than investors realise.

Europe faces a pressing challenge: decarbonising a real estate sector responsible for 40% of its energy consumption and over a third of energy-related greenhouse gas (GHG) emissions.¹

To address these issues, the European Union has introduced a raft of legislation, including the revised Energy Performance of Buildings Directive (EPBD), which came into force in May 2024. The Directive aims to reduce GHG emissions in the building sector by at least 60% by 2030 compared to 2015 levels, and achieve a fully decarbonised, zero-emissions building stock by 2050.¹

However, according to the European Commission, achieving these targets requires €297 billion of annual investment between 2024 and 2030, leaving an estimated annual shortfall of €149 billion.² In this context, private credit could emerge as a crucial source of capital.

Private lenders, unburdened by the same regulatory constraints as banks, can provide flexible financing, particularly to mid-sized projects—those that may struggle to access traditional sources of capital. And, as investors seek defensive strategies with measurable sustainable outcomes, real estate private credit could offer an attractive blend of income, impact and inflation protection.

Disintermediation in real estate finance: Following in the footsteps of direct lending

The rise of private credit in the post-global financial crisis period is a consequence of regulatory reforms that have limited the ability of banks to lend to lower-rated companies. Since 2010, the broader asset class has grown from US$45.7 billion to US$1.6 trillion, with corporate direct lending accounting for half the total.³

By comparison, real estate private credit strategies account for just over US$300 billion, less than 2% of the global private markets universe, and around a sixth of allocations to real estate more broadly.⁴

While the real estate sector has been slower to disintermediate due to historically lower bank capital requirements, recent changes to Basel regulations are forcing banks to become more selective and focus on larger, core assets and established sponsors.⁵

Under the standard Basel approach, risk weights for commercial real estate loans can be as high as 100% for some assets or where loan-to-value ratios exceed certain thresholds, while non-income-generating development projects can be subject to risk weights of 150%.⁶

This is creating a situation in real estate comparable to what we have already seen in direct lending: a need to finance capital-intensive refurbishment projects that fall outside the risk tolerance of traditional bank lenders.⁷

The push to decarbonise buildings is also becoming a geopolitical and economic priority. The Draghi report on EU competitiveness highlighted that achieving energy efficiency (and self-sufficiency) is essential if the region is to reduce its reliance on expensive and unreliable external energy sources.⁸

Meanwhile, other EU regulations such as the Corporate Sustainability Reporting Directive and Taxonomy for Sustainable Activities have helped drive investor flows into impact strategies.⁹ Combined, these initiatives are creating a favourable policy environment for real estate private credit.

The investment opportunity in an underserved market

As well as legislation, improving the sustainability of buildings is supported by a strong commercial rationale.

Various studies have highlighted a link between the sustainability of buildings, capital values and rental premiums. JLL, a professional services firm specialising in real estate, in 2023 conducted one of the most extensive studies to date, assessing almost 600 commercial property transactions in the London office market. Its analysis showed properties with BREEAM certification¹⁰ achieved an average 20.6% increase in capital values and 11.6% higher rents, while a single-notch improvement in EPC ratings¹¹  led to a commensurate 3.7% increase in capital values and 4.2% increase in rents.¹²

Figure 3 shows the distribution of EPC ratings in EU building stock, revealing a shortage of energy efficient properties, while the age profile of European office buildings illustrated in Figure 4 shows a high risk of obsolescence in major cities unless action is taken.

Figure 3: Distribution of EPC ratings for EU buildings

Source: Housing Europe, Copenhagen Economics, ‘Impact of Minimum Energy Performance Standards in the revision of the Energy Performance Building Directive,’ October 2021. Most recently available data used. For illustrative purposes only.

Improving a building’s energy performance can reduce operating costs, boost occupancy, and enhance asset value—creating a clear commercial case for lenders and borrowers.

We see opportunities to transform buildings into highly sought-after assets in economically robust locations. This may involve refurbishing or retrofitting older buildings to improve insulation, lighting efficiency and heating, ventilation and air conditioning systems; as well as new developments, where energy performance targets can be embedded into the design to help future proof projects against regulatory and obsolescence risk.

Transaction types range from senior-secured loans to mezzanine/bridge financing for acquisitions and redevelopment projects.

We believe an allocation to real estate private credit can offer investors comparable returns to direct lending but with added downside protection from loans backed by hard assets.

In terms of portfolio construction, senior-secured real estate private credit can provide valuable diversification given its high ranking in the capital structure and relatively low correlation with public bonds and equities.¹³ Moreover, real estate private credit with floating-rate payments and/or inflation-linked leases can provide a valuable hedge.

Thanks to these characteristics, and their modest solvency capital absorption, real estate private credit may be of particular interest to insurance investors.¹⁴ Additionally, as European base rates continue to fall, it may attract pension funds seeking a yield pick up over traditional fixed income assets, as well as diversification, asset-backed exposure and cash flows that match liabilities.

Future proofing

European real estate is bifurcating between future-proofed, sustainable assets and potentially stranded stock that do not meet the requirements of regulators or tenants. In our view, real estate private credit focused on energy efficiency and reducing emissions could offer a rare blend of downside protection, long-term capital appreciation and impact.

As demand for energy-efficient space rises across Europe, landlords race to comply with new regulations, and traditional sources of funding decline, there could be a significant opportunity for investors in real estate private credit to facilitate this transformation.

References

1.European Commission, ‘Energy Performance of Building Directive,’ May 28, 2024
2.Bruegel, ‘How to finance the European Union’s building decarbonization plan,’ July 2024. Most recently available data used.
3.Preqin, ‘Future of Alternatives,’ September 18, 2024
4.Preqin, ‘Future of Alternatives,’ September 18, 2024 and Preqin ‘Global Report – Real Estate 2025”, December 2024.
5.Deloitte, ‘2025 Commercial Real Estate Outlook, September 2024
6.Basel Committee on Banking Supervision, ‘Calculation of RWA for credit risk,’ December 12, 2024
7.CBRE, ‘The debt funding gap for European real estate,’ December 2023
8.European Commission, ‘The Draghi report on EU competitiveness,’ September 9, 2024. The EC-commissioned report was written by Mario Draghi, ex President of the European Central Bank.
9.Morningstar, ‘Inflows Surged for European Article 8 ESG Funds in Q4,’ February 2025
10.BREEAM (Building Research Establishment Environmental Assessment Method) was established in 1990 to assess the ESG performance of buildings, which are rated on a scale from pass, good, very good, excellent to outstanding.
11.An EPC (Energy Performance Certificate) rates the energy efficiency of buildings and is a mandatory regulatory requirement for most European properties. EPC ratings run on a scale from A (most efficient) to G (least efficient).
12.JLL, ‘Environmentally sustainable real estate attracts higher prices,’ January 17, 2023
13.Preqin, ‘Preqin Academy: Private Debt,’ as of May 2025
14.Muzinich and COIMA analysis of EU Solvency II Directive 2009/138, Delegated Regulation (EU) 2015/35, as of June 2025.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of June 2025 and may change without notice.

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