If ‘covid’ is one of the most used words of the past 18 months, ‘accelerate’ is not far behind – in the property industry at least. Market participants frequently point to the covid crisis accelerating pre-pandemic trends, encouraging building owners to think about how end-user demand for real estate is changing.

That can include improving assets to meet fast-changing environmental, social and governance standards, and doing more to meet occupiers’ higher expectations around well-being as they entice employees back to buildings such as offices. It can also mean changing the configuration, or even the entire use, of a property, to make it relevant to current and future demand, such as converting empty retail units into new homes.

Europe’s real estate debt advisers are being called upon by clients to help raise finance for a wide range of real estate improvement projects.

Demand remains

Taking an overall look at borrower demand today, Nassar Hussain, founder and partner of independent debt advisory firm Brookland, says the picture is largely fixed “on traditional assets, where borrowers are undertaking value-add initiatives and are typically looking to refurbish and modernise existing space, to provide more facilities, or they are looking to add additional space to existing buildings”.

“People are going to demand best-in-class to convince their workforce to come back into the office. They want a lot of natural light, with good ventilation”

Dan Uzan
Brotherton Real Estate

There are many financing requests for office revamps, says Dan Uzan, managing director of London-based debt advisory firm Brotherton Real Estate. “People are going to demand best-in-class to convince their workforce to come back into the office. They want a lot of natural light, with good ventilation.”

Uzan says lender appetite in the office sector is focused mainly on core, grade A stock. However, he adds that the lending market is liquid, provided sponsors have strong business plans and realistic rental assumptions. “We are financing a lot of office refurbishments and repositioning in the right market, where there is a good story, and where [sponsors] are buying for the right price,” he adds.

Some sponsors are aiming to transform dated assets into new uses. Offices into residential is a trend being seen in continental Europe, says Maud Visschedijk, head of EMEA debt and structured finance at consultancy Cushman & Wakefield. “We are seeing the heavy refurbishments,” she says. “For instance, when an old asset gets revamped into a more sustainable one. Lenders are positive about investing and improving the quality of assets under the ESG label.

“With retail, what we have seen is that it is often converted, but the retail is low-rise – mostly one to two floors – so [owners] get permits from the municipality to add more floors on top. This makes sense, as you can then add residential units, which there is a shortage of, so it is a win-win situation.”

Hussain is also seeing conversions of offices into hotel space. He explains that lenders have proved willing to fund such projects on the basis that they will be delivered into a market in which people are visiting hotels again. “This started pre-covid, and those transactions have been supported throughout covid, as hotels don’t start trading for at least a year, so they were able to get funding support.”

Sources of finance

When it comes to financing sources, Uzan says simply: “The more extensive the refurbishment, or repositioning of the office building, the less likely you are to borrow from a mainstream, high street bank which is typically more risk averse. If the business plan includes substantial capex, and leasing risk, then lender appetite tends to come from debt funds or private equity firms. If, however, the business plan is a rolling refurbishment programme while retaining a good portion of the tenants and income during the term of the loan, then the more traditional banks will consider this type of project, although typically at lower leverage than you would expect from a debt fund.”

Jonathan Jay, partner at the London-based debt advisory firm Conduit Real Estate, says it is increasingly the debt funds, rather than major banks, providing solutions to real estate clients.

“The banks are by no means irrelevant,” he says. “But they are less dominant. The banks will always have an important part to play. However, debt funds are already structurally established in the lender universe, as seen in the number of new funds actively deploying capital or in fundraising mode. Banks and alternative lenders have different risk profiles. Banks are capped at 50-55 percent loan-to-value, and they will not take speculative development risk. Debt funds can take a view on things. They can say, ‘For this sponsor, I think my margin is going to be X, but actually my leverage is going to be Y.’ And they are much more willing to take that risk based on the actual real estate.”

Advisers say it is possible to source the leverage necessary for a range of improvement schemes, from refurbishments to redevelopments. Uzan says the market is there for anywhere between 50 percent and 75 percent of the total cost of acquiring and refurbishing a project. “We are financing a ground-up office development in south London, where we are borrowing 70 percent of the total cost of that project. Somewhere between 50-75 percent loan-to-cost is achievable.”

With any improvement project comes the risk of cost and time overruns. Advisers say it is important to work closely with borrower clients to ensure they source finance on appropriate terms for the project they are undertaking.

Uzan explains Brotherton considers several eventualities for clients’ plans. “If they say it is going to cost £250 or £300 [€295 or €354] per square foot to build, we will think, ‘What happens if it goes to £350 per square foot to build it?’. If the client says, ‘I am going to rent this office out for £60 per square foot,’ we might check and say, ‘Maybe you are going to rent at £50 per square foot,’ and so we are then managing the client’s expectations to ensure they are not borrowing more than they can service. We make sure they understand everything they enter into, and that there is headroom.”


While there has been much focus on refurbishment and repositioning of standing buildings, sources say there is still an appetite among sponsors for new-build projects. In the office sector, Cushman & Wakefield figures show more than 78 million square feet of new stock or major refurbishments are due to complete in 2021 across Europe’s major cities. Many schemes were planned or underway before the pandemic, and this stock is unlikely to be a net addition to the market due to older space being demolished in the process. However, it does show there is an appetite to deliver new property.

Some in the market say there are lenders that are increasingly willing to provide significant leverage against the more sought-after development projects. In parts of continental Europe, there has been an increase in the use of subordinate loans, which Cushman & Wakefield’s Visschedijk says has some people worried. “We are seeing more mezzanine loans in Germany to increase the leverage to a higher amount. It looks a little bit like what was happening before the financial crisis [of 2007-08] as the amount of fresh equity investors bring to the table is getting smaller,” she says.

Visschedijk adds that lessons have been learned since 2008 about how lenders structure such loans, with completion guarantees and cost overrun guarantees required. However, she says fierce competition among lenders for some of the more popular development schemes has led to some lenders letting go of the ‘equity first’ requirement – by which the sponsor pays the costs of the scheme through equity initially, with debt subsequently drawn to cover the remaining costs of the construction – and accepting equity and debt to be invested on a pro-rata basis. Such arrangements are only for selected sponsors, she adds.

Other advisers note an uptick in demand for construction schemes in recent months. Uzan says: “There is more demand for development projects now than there was nine or 10 months ago when we were in the heart of the pandemic.” He adds that his firm is currently sourcing finance for ground-up residential, student accommodation, office, industrial, hotel and care home schemes.

Debt advisory sources say lenders are particularly keen to provide terms for residential sector schemes due to the shortage of stock in many locations and the resiliency such properties have demonstrated so far during the pandemic. Appetite to finance logistics schemes is also reported to be high, with the sector having been boosted by the growth of e-commerce during the pandemic and the subsequent rise in demand for last-mile logistics facilities. Debt funds and private equity firms are particularly willing to provide speculative development finance for logistics, sources say.

But Uzan says lenders still need to consider the logistics sector cautiously. “Rents and yields are not comparable with levels seen five or 10 years ago, so lenders need to be comfortable that rental assumptions and exit yields are achievable and sustainable.”

Sources say construction finance is scarcer in the more challenged parts of the real estate market, with fewer lenders willing to provide terms on office and retail schemes, particularly if they are being developed speculatively.

However, while appetite varies according to sector, some in the advisory space note a belief among some lenders that financing construction projects, which will be delivered into what most expect to be more favourable market conditions, can have advantages over providing finance to existing properties during the uncertainty of the pandemic.

As real estate owners plan for an uncertain future, be that through
refurbishment, repositioning, or new development, debt advisers are playing an important role matching them with credit providers willing to underwrite their business plans.