Debt for refinancing likely to decrease in 2023, ULI, PwC survey reveals

Available debt for refinancing or investment is likely to decrease in 2023, according to the majority of respondents to a new survey, produced by industry body the Urban Land Institute and consultant PwC.

Fifty-five percent of respondents to the Emerging Trends in European Real Estate 2023 report believe that the supply of debt for refinancing or new investments will “decrease somewhat” in 2023, while 9 percent said it would “decrease significantly”.

“We think everything’s going to be worth less next year than it is this year,” said one unnamed bank lender interviewed for the report.

“Now, that’s obviously a generalisation,” the interviewee added. “There can be reasons why a particular asset would outperform. But if you just bought a relatively dry asset, we think it’ll decrease in value over the next 12 months. So that makes it quite a challenging time to look at financing things.”

Investment manager AEW warned in October that a decline in the amount of leverage that lenders will provide, combined with falling capital values, could trigger “significant refinancing” problems for real estate loans maturing over the next three years.

The manager is forecasting a cumulative debt funding gap – the shortfall between the amount of debt due to be repaid at loan maturity and the amount of new debt available to repay it – of €24 billion across the UK, France and Germany between 2023 and 2025.

Lisette van Doorn, ULI’s European chief executive, said the industry had become “even more worried” since the research process, which canvassed the views of 1,038 European property professionals during the summer.

The report said that while distress is highly unlikely to reach the proportions of the global financial crisis, owing to lower leverage levels, the rise in interest rates will “undoubtedly create stress” meaning some owners will have to sell assets at reduced prices.

The report highlights that investment deals completed in 2018 and 2019, which were the two highest transaction volume years ever in Europe, could struggle to find lenders willing to refinance associated loans.

The report argues that loans underwritten in those years were likely to have been made at a loan-to-value of 50 to 60 percent but falling values might mean those LTVs are now the equivalent of 70 to 80 percent, a level that lenders may “be reluctant to refinance”.

In addition, loans underwritten when interest rates stood at 1 percent, the report said, would now have to be underwritten at rates three or four times higher, decreasing the ratio by which the income covers the interest payments on debt. “When the recession bites, occupier performance will be weaker, which could erode the income being used to pay the interest on loans,” it added.

Borrowers unprepared to invest equity in a deal to lower the LTV might find banks less willing to “extend and pretend”, as they did post-GFC, argues the report, because distress is not as acute.

The report quotes an unnamed fund manager who says there was “no reward for [banks] acting early” when LTVs went up to 130 percent during the GFC, but that now LTVs had gone from 60 to 80 percent, lenders are “not going to lose money in a sale, so it is the borrower’s problem, not theirs”.

Meanwhile, the Bank of England’s slotting regulation and Basel III European Banking rules, both due to come into force in 2023, mean it will be more expensive for banks to hold loans when LTVs rise, further incentivising lenders to push for sales, the report concluded.