Digitalisation and European Debt Investing

As global megatrends around urbanisation and digitalisation accelerate, real estate markets are being reshaped in ways that present compelling opportunities for alternative lenders.

Key European cities and urban areas are growing rapidly, driven by net inward migration and a shift away from rural areas. These demographic shifts are creating twin pressures: the need for new, modern housing; and the parallel demand for infrastructure to support these new homes. For investors, this looks to be a moment strategically to align capital deployment with the future of urban living, where housing; logistics and distribution facilities; and societal and digital infrastructure will benefit from strong growth potential and the opportunity to create long-term value.

The continued rise of e-commerce: 
As online adoption continues to extend across Europe, e-commerce is experiencing unprecedented growth. Between 2023 and 2028 alone, e-commerce revenue in Europe is expected to increase by 38%, to €859 billion1, underpinning a resilient demand base for modern logistics and warehousing spaces across Europe.

As consumers shift to digital shopping, retailers are forced to rethink their supply chains to meet rising demand  for fast, efficient, and reliable deliveries (as well as the means to process returns). This requires a new generation of strategically-located warehouses, distribution centres, and last-mile properties that can support the complexities of modern e-commerce, creating new opportunities for asset managers with a deep-rooted understanding of the sector.

FDI and Nearshoring in Europe:
Major European economies such as France, Germany, the Netherlands and the UK have long had high outward foreign direct investment (FDI), but are now recognising the urgent need to build the domestic physical backbone that will support this digital revolution. Nearshoring - where Governments incentivise, and companies move - production closer to key markets has become a critical solution to the vulnerabilities exposed by global supply chains, particularly during the COVID-19 pandemic. On average, 52% of companies have planned to nearshore in the last four years². As major European economies have invested more abroad than has been received, nearshoring will help retain 
investment at home. Between 2021 and 2023, average net FDI outflows across Germany, France, Netherlands and the  UK reduced by €90 billion3. As European businesses relocate production and distribution facilities closer to home, the 
demand for warehousing and logistics infrastructure within the region has the potential to surge.

In order to meet the current demand, institutional sponsors are considering two primary options to deliver modern supply - developing new, green projects; and repositioning older or redundant assets, either through conversion or renovation, into high quality industrial stock. In a challenged environment where banking liquidity is sometimes constrained, the debt capital requirements for this transitional finance will be largely served by the alternative lender community.

Beyond these macro trends, there is also a cyclical opportunity for alternative lenders, as most European logistics markets are still showing very positive signals and robust occupational demand. Low vacancy rates in most markets are driving rental growth, yields are stabilising at acceptable levels and transactional activity remains strong. European industrial and logistics investment volume hit its lowest point in 2023, however, the market has picked up gradually throughout 2024. This, combined with the structural drivers of the logistics and industrial market performance (limited land availability, restrictive planning regimes, complex legal frameworks), should support property income yields and capital values.

Alternative debt providers have a unique opportunity to capitalise on Europe’s evolving infrastructure and asset financing needs, and to be at the forefront of this capex supercycle. Between 2024 and 2026 alone, $3.4 trillion of cumulative investment in reindustrialisation (nearshoring, supply chain optimisation) is expected globally, $2 trillion of which pertains to Europe including the UK4. The rewards for alternative lenders who position themselves effectively will be significant and enduring.

(1) ECDB, July 2024 
(2) EY, May 2023 
(3) OECD 
(4) Capgemini

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