This article is sponsored by Invesco Real Estate
Amid a tough market dominated by limited liquidity, Invesco Real Estate has focused its efforts on sourcing acquisition loans, says Andrew Gordon, managing director, head of European real estate debt. The firm’s success in finding such deals – recognised with the award for Mid-Market Lender of the Year (€20m-€70m Market): Europe – has been strengthened by a combination of local expertise and global reach, he says.
How were lending market conditions in 2024?
Last year was relatively tough in some ways. The majority of opportunities were refinancing deals, as liquidity in the investment market remained restricted. Many of the transactions involved banks and borrowers trying to refinance existing deals.
However, we were primarily focused on acquisition financing rather than refinancing. We always prefer deals where there is new equity and a fresh asset management plan, especially in a market where valuations are still volatile and uncertain. Lending on a refinance based on an independent valuation always presents challenges, so we were fairly cautious in selecting the deals we moved forward with. That said, we were fortunate to find plenty of acquisition financing opportunities.
Our ability to source these acquisition financing opportunities relies on both our local presence and global network. We benefit from being part of Invesco Real Estate’s team of 190 in Europe, spread across eight offices. The combination of people on the ground identifying local opportunities and our global relationships with the biggest and best real estate investors provides a truly differentiated origination pipeline.
Your firm was awarded mid-market lender of the year. To what do you attribute your success in that part of the market last year?
With teams all around Europe, we are well positioned to underwrite opportunities quickly and efficiently. We have lent into 10 different countries in Europe, including more challenging markets such as France and Italy. By deploying debt through newer structures, we have been able to navigate requirements and security challenges effectively in these countries.
A lot of our success comes down to our pragmatic attitude. We align loan terms with the borrower’s business plan, focusing on understanding their goals rather than following an automated tick box exercise.
Our reputation for consistency and reliability, even when things don’t go according to plan, has also been a key factor. Inevitably, changes to the asset management plan arise as a loan progresses. If borrowers are confident that the lender will understand these changes and make accommodations where sensible, it fosters trust and reinforces our role as a relationship-led lender throughout the loan term.
In addition, our access to flexible capital allows us to lend across the capital stack and solve borrower challenges. In the current market, this flexibility has been critical to securing deals.
How did borrower demand in the mid-market space change last year?
We saw a lot of refinancing opportunities and they made up the majority of the available deals. We also saw a lot of pretty heavy asset management plans – whether they included construction, capex or refurbishment – often with a strong ESG focus to ensure properties were upgraded and made resilient for the future.
A lot of borrower demands were for a lender to really buy into the business plan to improve the value of buildings. I think that is where we managed to add significant value to borrowers. There is also no doubt that the high-interest rate environment had a chilling effect on the market, so we are particularly pleased with our deployment in this context.
What were the challenges of financing transactions in the mid-market last year?
There was an on-going challenge of having enough cashflow from a deal to cover debt service. Everyone waited a long time – and to some extent they are still waiting – for interest rates to come down. I think people’s mindsets are turning towards a higher-for-longer outlook.
That means people need to come up with leverage levels, structures and potentially credit enhancements to ensure good levels of debt service cover, especially when looking at assets that need work before they can be let at market rent. Working through some of those credit enhancements and cashflow challenges was fundamental in allowing us to close some of the deals.
How do you expect financing needs in the mid-market to change this year?
We think there will be a lot more opportunities. Banking regulations, we believe, will continue to hold banks back, but also force them to start pushing some of the sub-performing deals off their balance sheets. I think the general view of higher-for-longer means that people will move away from ‘extend and pretend’, which should lead to more investment activity.
We think investment activity will grow through 2025 as buyer and seller expectations converge and this is what we want: people buying assets and, therefore, looking for acquisition finance, which we want to provide.
With interest rates expected to stabilise, financing conditions should become more predictable, encouraging more investment activity.
What will be the main challenges and opportunities for European real estate markets in 2025?
We expect to find plenty of opportunities. Bank regulations are holding banks back and higher-for-longer interest rate expectations mean that those banks will start pushing deals off their balance sheets.
In terms of challenges, higher interest rates still pose cashflow issues, particularly in ensuring that assets generate sufficient cashflow to meet debt service coverage ratios. But again, we believe this plays into our strengths – such as deep experience and flexibility in structuring options – to ensure the right loans can still be made at the right leverage levels.
This year’s market will continue to present many challenges; it won’t be straightforward. That is why flexibility in both approach and capital will remain key to finding and securing the right deals.
