As real estate loans that have already been extended reach maturity in the coming months, fewer lenders are likely to extend them further, leading to an increase in activity, according to debt and equity specialists at advisory firm Savills.
Activity in the European market in the past 18 months has been weighted towards borrowers extending loans with existing lenders, in response to changing market dynamics driven by interest rate rises, explained Andrew McMurdo, head of debt advisory at Savills.
Relatively few genuine refinancing deals – with sponsors sourcing entirely new loans – have been closed during the period, he told Real Estate Capital Europe. “As borrowers face refinancing in the new rates environment, the simplest and lowest cost option has been to negotiate with your existing lender for an extension. This may come with an increased margin in return for amending the term and covenants, but that can be a better deal than going out to the market.”
However, McMurdo expects to see fewer loan extensions in the coming months, likely leading to more transactional activity. “When maturities come around again, we suspect it will be more challenging to extend again as the risk position is unlikely to improve significantly in the short term, and this should drive more investment activity and actual refinancings.”
Equity market slowdown
The higher cost of debt is having a continued impact on transaction volumes, according to McMurdo’s equity-side colleague, Emma Steele – director in Savills’ global cross-border investment division. “The increased cost of finance has been a major challenge for property investors,” she explained. “Investors have enjoyed cheap finance over an extended period, and with that now ‘gone’, understandably some appetite has waned.”
Higher financing costs have served to impact investment activity in particular in the larger lot size space, Steele explained, and as such 2023 has been a year marked by mainly smaller trades, where debt is not required, she said.
However, McMurdo sees better investment and financing conditions in some parts of the market. “Sponsors that are buying into assets with short tenancy, such as build-to-rent residential, purpose-built student accommodation, hotels, can look at reversionary yields to drive their business case.”
Despite the relative lack of financing activity, McMurdo believes there is no shortage of prospective lenders in the market. However, he said they can face a challenge matching liquidity to capital structures that can support debt at new financing costs. “In theory, it is a great time to be a lender, and as the investment market starts to recalibrate, we will see more activity,” McMurdo said.
With existing capital structures being stretched from a cashflow standpoint, many lenders have turned their focus to development financing opportunities, he added. “We see significant liquidity and risk appetite to lend into development loans, particularly in the living sectors. With the interest being rolled up, the focus on cashflow is at the point of refinancing rather than now.”
For the time being, uncertainty around values continues to make for challenging conditions for real estate investors and lenders, McMurdo and Steele agree.
Steele explained there is limited transactional evidence on which to base a firm view of values. “It’s hard to make any broad-brush assumptions, and I am having that conversation on repeat with investors right now. People want to extrapolate from the deals that are happening, but every transaction is so highly nuanced. In some ways almost every deal happening in London offices now is bucking the trend in one way or another.”
“I don’t think much will change before the end of the year, but there will be some bank-led processes which will enliven the market because people get more engaged when they know there is certainty of a sale,” said Steele.