Is it better to invest in real estate debt or equity? It depends on what you are looking for. Both allow you to participate in real estate projects, but they offer different expectations in terms of returns, investment periods and risk exposure. At Urbanitae, the ability to select individual investments allows investors to combine both strategies according to their objectives.
Two different positions in the same project
With debt, investors lend capital in exchange for an agreed interest rate. With equity, they invest in the project’s capital, and their return depends on the final outcome: it may exceed forecasts, fall short of expectations or even result in losses.
Debt generally takes priority over equity when it comes to repayment. However, not all structures are the same: a senior loan secured by a first-ranking mortgage does not offer the same protection as subordinated debt. Preferred equity also exists, with distribution rights that take priority over ordinary equity. Before comparing percentages, it is important to understand where your money sits in the capital structure and how it will be recovered.
When to prioritise debt
Debt may suit investors seeking greater predictability of returns and relatively short investment periods. At Urbanitae, many transactions have estimated terms of between 12 and 24 months, although there are exceptions. The interest rate and expected repayment schedule are known from the outset.
However, an agreed interest rate does not mean a guaranteed return. The borrower may default, and repayment may be delayed or only partial. That is why it is essential to examine the source of repayment — property sales, bank financing or refinancing — along with repayment priority and security. Ratios such as loan to value (LTV), which compares the amount financed with the property’s value, and loan to cost (LTC), which compares it with the project’s cost, are also useful.
Debt may be appropriate for those who prefer to limit their dependence on the development’s final profit, while recognising that they still face credit and liquidity risks.
When to prioritise equity
With equity, investors participate directly in value creation. If a development sells better than expected or its budget is kept under control, they may benefit from that improvement. If costs rise, prices fall or the timetable is extended, returns may deteriorate.
Its greater potential for returns is generally accompanied by more uncertainty and longer investment periods. Many Urbanitae projects have estimated terms of 24–48 months, although each investment has its own schedule. They may involve developing homes, transforming buildings or repositioning commercial properties.
Equity therefore makes sense for investors who can commit their capital for several years and accept that the target internal rate of return (IRR) is an estimate, not a promise. The key is to assess how much room the project has to absorb deviations from the plan and what experience the developer brings.
The investment term does not tell the whole story
Speaking at Rankia Markets Experience, Diego Bestard, founder and CEO of Urbanitae, warned of a tendency to concentrate investments in the short term. But a shorter term does not necessarily mean lower risk.
An equity investment needs time to progress through permits, construction, marketing and sales. These milestones can create value, but they can also introduce delays. Likewise, debt approaching maturity does not guarantee that the money will be available on that exact date.
It is therefore important to distinguish between the project’s estimated term and the period for which we can genuinely afford to have our capital tied up.
Combining strategies for better diversification
Diversification is not simply about spreading money across many projects. Consider two €10,000 portfolios: one split between ten residential equity developments in a single city, and another combining debt and equity across different locations, sectors, developers and maturities.
The second spreads exposure across a wider range of risk factors. It does not guarantee better results, but it reduces dependence on a single market or strategy. This was another point highlighted by Bestard: combining structures, assets and investment terms can be just as important as increasing the number of investments.
Choose according to your goals, not just returns
If we are looking for more predictable returns and generally shorter investment periods, it may make sense to allocate a larger share to debt. If we have a longer time horizon and want to participate in the potential for value creation, equity may play a greater role.
However, no label replaces a detailed assessment of the individual investment: subordinated debt may involve significant risks, while preferred equity may have a different profit distribution structure from ordinary equity.
Debt and equity are not opposing strategies, but complementary ones. The best combination depends on how long we can invest, what losses we could withstand and how each project fits into our overall portfolio.
