Europe’s debt advisory opportunity

The European commercial real estate debt market is restructuring on a massive scale. Soaring interest rates and falling transaction volumes are impacting a sector still struggling to recover from the global pandemic.

In the US, this has led many large, full-service commercial real estate brokerages to allocate more resources to growing debt advisory services teams, which may become a more profitable area of the business as the debt advisory services market continues to
mature.

In Europe, rising interest rates are increasing the cost of commercial real estate loans, and loan rates are expected to remain higher than they were during the last cycle. Europe is facing a looming refinancing gap as a growing number of loans backed by commercial real estate assets are set to mature in the coming years. This has led many brokerages to expand their European debt advisory services like they have been doing across the pond.

A shift in resources

Chris Gow, head of debt and structured finance at CBRE, says that brokerage firms are likely to restructure in this way regardless of the performance of other aspects of their business. “Whether transaction values have been dropping or not, debt and structured finance is a strategically important part of the business. We have grown it over the last 10 years and, while in relation to the rest of the CBRE business it is relatively small, we will continue to grow it in the coming months with several ambitious ongoing initiatives.”

The debt advisory sector in Europe, historically handled by a few specialist firms, is growing in demand and increasingly attracting the attention of larger commercial real estate firms.

David Gingell, international partner of equity, debt and structured finance at global commercial real estate services firm Cushman & Wakefield, says that debt advisory services are being impacted by a range of factors in addition to the relative performance of the various parts of brokerages’ core business.

Gingell says: “There is both a structural and a cyclical shift at play here. The structural one is how the debt market is going through a full-scale restructure, becoming more complicated and requiring informed, independent advice to help navigate it. This structural shift is what’s galvanising talent to the space, and large brokerage houses are driving this growth. On the cyclical side of things, rising interest rates mean debt and investment sales teams must work together to find solutions and make transactions happen.”

Borrowers and lenders alike are increasingly looking for advisory services. Brokerages see an opportunity to provide a one-stop shop to advise investors and owners on all aspects of commercial real estate transactions, from obtaining favourable acquisition or construction financing to helping owners with decisions about refinancing or resolving issues with the capital stack.

Both Cushman & Wakefield and CBRE have hired people to expand their European debt advisory teams, largely focusing on Western Europe, following their clients’ interest in the region and providing them with local finance experts.

Gingell joined Cushman & Wakefield in September 2022 from PGIM Real Estate, where he worked as head of European senior debt and was based in Frankfurt, Germany. At Cushman, he has been directly involved in closing senior and mezzanine loans valued at over $5 billion in nine European markets.

“Our team continues to expand across Europe and beyond,” Gingell says, noting the latest addition of Simran Patel in London, who joined from Lloyds Bank to support and grow its UK and European operations. “We have people on the ground across Western European markets, with two key hubs in Amsterdam and London. We are also developing our Asia-Pacific team and see the co-ordination across these geographies as critical, given the global nature of capital and the industry.”

It is a similar case for CBRE, which has more than 40 people in the UK and Europe on its debt advisory team.

“Our largest teams are in the UK and Ireland, Netherlands and Spain. But, unlike other firms, we have boots on the ground in every major market,” says Gow. He notes that the company last year hired Daniel Sander to lead its debt advisory business in Germany, adding, “he is growing the business strongly”.

Earlier this year, Knight Frank named Josephine Jones as head of strategic capital within its capital advisory group. And last year, JLL appointed Gang Hu as managing director in its EMEA loan advisory and restructuring services team. More recently, Colliers announced Carla André would lead its debt advisory activity in Portugal as a senior adviser.

Despite the recent changes brokerages have made, European debt advisory services are still years behind those in the US, where investors typically rely more on big brokerages for completing real estate deals.

However, market participants in Europe can gain an idea of how the sector will develop by looking at the US market.

“Debt brokering has become much more mainstream in the last few years in Europe and, while penetration levels will continue to grow, they have some way to go to match what we see in the US,” Gow says.

While big brokerages are growing in the larger European markets, boutique firms still play a key role in the industry. Gow predicts some of those smaller firms may even grow their teams into the US in the coming years.

“We may see some European boutiques expanding into the US, but it will be a difficult transition as it is already a mature advisory market,” Gow says.

Refinancing challenges

Debt advisory services are experiencing a higher volume of refinancing business these days, but Gow notes that most lenders are not looking to extend loans at the same levels they had done in previous years.

While interest rates and implied debt returns are high, lenders are becoming more cautious due to already falling commercial real estate values and further risks in the economic outlook. These trends coincide with tighter underwriting standards and a higher degree of selectivity becoming increasingly common, changing the types of deals advisers are completing.

“Before the market corrected last year, refinancing deals accounted for less than 20 percent of our mandates. Whereas this year, 80 percent is refinancing, and I expect that will continue into 2024,” notes Gow.

“Interestingly, we are seeing large numbers of investors being willing and able to deploy mezzanine in CRE instead of focusing purely on equity positions. We’ve moved to places we wouldn’t have been before the market corrected.”

More loans are set to mature this year, leaving many brokerages considering the looming refinancing gap in Europe. Time is the most important factor for borrowers, according to Gingell.

“My observation is lenders reward borrowers who grasp the challenge early. Indeed, lenders have actively promoted our services to borrowers to provide structure to the process and ensure anything more complex – such as senior and mezzanine refinancing – has the relevant expertise behind it. There is significant capital available for refinancing with senior, whole loan and mezzanine all playing a role.”

“Debt brokering has become much more mainstream in the last few years in Europe [and] penetration levels will continue to grow”

Chris Gow,
CBRE

Looking to the future

Ongoing market volatility has made it difficult to predict the future of debt advisory services. But the future appears clearer when one considers two near certainties: lenders have become more focused on cashflow and debt serviceability, and borrowers are struggling to refinance existing loans due to higher debt costs, decreasing asset values, economic uncertainty and fewer traditional lenders willing to take on certain types of debt.

“Over the next few years, higher borrowing costs, falling values and tighter lending conditions mean that the market will face a widening funding gap – a shortfall of available new debt compared to requirements linked to the servicing, rolling over and repaying of existing loans,” says Henri Vuong, head of debt investment research at asset manager PGIM Real Estate.

“While debt will remain available in stronger sectors and markets in which occupier performance and capital values are supported by favourable structural trends, the dislocation implied by the funding gap will drive further repricing,” she says.

Gow notes that corporate and leveraged finance debt advisories really took off after the global financial crisis, when that market became very illiquid.

“I always believed a similar trend would be seen in real estate debt advisory, and the combination of covid-19 followed by the market reset will help drive real estate debt advisory to the mainstream. Market acceptance is growing, and clients will continue to use debt advisers when the market fully recovers to save them money, time or both. As volatility reduces and inflation and interest rates come down, both lenders and investors can underwrite in a more accurate way, and that is a benefit to everyone.”

Gingell says the good news is the lending market is functioning well so far, with margins remaining competitive and capital options available across asset classes. “Lending volumes follow transactions. So, to the extent vendors and purchasers start to agree on price once more, that’s when the cycle will restart.”

For borrowers looking to strengthen their capital stack with a loan adviser, Gingell recommends starting early and working with a debt adviser that will be able to analyse options and provide support through the closing process. “Borrowers who then go on to lock in financing early will see their capital stack strengthened and an ability to work through the wider price reset occurring at the asset level,” says Gingell.