Processing the end of the low interest rate environment has not been a quick and easy task for the European real estate market. At first, as rates spiked in the latter part of 2022, there was shock. This past year has been characterised by inertia, and a touch of denial.
In many cases, loan extensions – a dominant theme of 2023 – have served lenders and sponsors well. Not only have they provided valuable time for real estate investors to redesign business plans around unexpected rate rises, they have also given market participants the opportunity to take a watching brief on how economies performed in a set of unexpected circumstances.
In decision-making, factual clarity is critical. Now this is emerging on a macro-economic scale, next year will be a year of acceptance of a new basis for borrowing and lending.
Data from central banks shows interest rate rises are bringing a measure of control to inflation. For real estate borrowers, this means they can begin to plan for a near-term future in which rates are unlikely to go much higher and are not about to be cut to any meaningful extent either.
“Next year will be a year of acceptance of a new basis for borrowing and lending”
There is also comfort to be derived from stronger than expected GDP growth and employment figures. More evidence around rental performance in relation to the sectors where income is holding up is also helpful. This is providing lenders with more of an idea of whether borrowers are able to service their debt.
A belief among many in the industry that more stable macroeconomic conditions are ahead is encouraging market participants to resolve lingering situations of stress, and tackle refinancing needs. Advisers say lenders are now unlikely to continue extending loans but are instead positioning themselves for frank discussions with sponsors. A clearer outlook will also enable borrowers to decide if investing equity to bridging refinancing gaps is a sensible use of capital.
Expect another bumpy year
All this means lenders and borrowers will enter 2024 with the salient figures needed to tackle the problems they face in managing existing debt. However, it does not mean next year will be anything like a return to form for the industry.
The overriding question facing the industry – what property is worth today – remains unanswered. Although the gap between the bid-ask spread is narrowing, property values are uncertain – most of all, in the office sector. While debt costs are better understood they are higher than the industry has been used to, a factor which will continue to weigh on the investment market.
Despite all this, more lenders and borrowers are determined to get on with resolving refinancing problems, which have been so debilitating this year. It is not the ultimate turning point for better times, but it will be a significant one nonetheless.