The spike in interest rates paired with expectations of a correction in property values contributed to a slump in real estate investment and lending activity in Europe in the latter part of 2022. Now, despite lingering concerns for the health of the sector, some lenders say an improved economic outlook gives them more confidence to underwrite loans.

Signs of easing inflation have prompted expectations of more stable rates. In CBRE Investment Management’s February Macro House View paper, chief economist Sabina Reeves said the manager expects “another 50 basis points of rate hikes in the UK and eurozone, with the terminal rate being reached maybe as early as this quarter”.

Meanwhile, data provider MSCI’s figures suggest the fall in values may be slowing. All-property returns in its UK index were negative in January for the seventh successive month, but at -0.2 percent they had improved from October’s low-point of -6.5 percent.

“The market was shocked into a pause in the last quarter of 2022 due to the sudden spike in rates and the market recalibration that necessitated,” says Lorna Brown, chief executive of London-based lender Birchwood Real Estate Capital.

“There were also some motivated sellers in the market. So people were seeking clarity before committing to new deals.”

Although Brown believes the “mists have not completely cleared”, she sees more stability in market conditions. “Interest rates appear unlikely to peak at the feared 6 percent mark, so this gives people some perspective on the readjustment to a long-term norm. Rates are more likely to peak around 4.5 percent, so lenders are starting to be more comfortable underwriting through the uncertainty.”

Andrew Gordon, head of European real estate debt at US-headquartered manager Invesco Real Estate, has observed a faster adjustment in values in the UK than in continental Europe. “It gets us to the point where, certainly in the UK market, we can make a loan at 65 percent loan-to-value and be confident about it. That is a big change since Q4.”

Income is crucial when considering deals, he adds. “It is most important to figure out if there is enough cash being generated by the property to service the debt. That is front-and-centre of every lender’s mind right now.”

While there is more macroeconomic clarity, lenders admit underwriting remains challenging. Hanno Kowalski, managing partner at Berlin-based lending platform FAP Invest, describes a German market in which buyers and lenders are eager to deploy capital but are fearful of making mistakes.

“There is liquidity if a deal is considered to be at the right price, but the big question is: what is the right price? Valuation levels vary. Everyone is waiting to see the big, sample transactions to show where the market is,” he says.

“I don’t think we’re all the way there on price discovery and values,” adds Brown. “Some real estate sector values have moved faster than others. As a result, borrowers and lenders are taking a prudent approach towards forthcoming refinancing. If people have a refinancing in 2023, they are getting on with it. That is driving activity.”

Brown sees acquisition finance requests from both opportunistic investors and those looking at wealth preservation strategies. But the balance of activity is still skewed towards refinancing. “The first half of the year will probably be more about refinancing and the second half may be more acquisitions, as investment deals take time to come to fruition.”

Gordon sees requests for development finance which he admits may sound surprising. “But commencing a development now for delivery into the market in two years’ time could be good timing.

“The question is how easy it is for debt to be accretive. There are some borrowers with deep pockets that will develop with their own capital. But for a lot of developers, the prize of the profit once the scheme is completed is worth the extra cost of debt now.”


Claus Skrumsager, who runs the North Haven Secured Private Credit Fund for the asset management arm of Morgan Stanley, argues that debt and equity markets have remained liquid. The higher cost of debt, rather than its availability, caused buyers to pause in Q4 while refinancings continued in sectors including residential, logistics and hotels, he says.

“The markets did not dry up. There is still a lot of dry powder to be invested,” Skrumsager adds. “Clearly, some banks retreated, and debt funds which rely on back leverage were challenged. But if borrowers can accept lower leverage and wider margins, there is liquidity.”

Others note increased caution from certain lender groups. Germany’s banks are among those playing it safe, explains Kowalski. “Banks are overcautious. Many are still in the market, but they are only willing to provide maybe 40 percent of the value, where they were previously providing 60 percent. Unlike alternative lenders, they cannot base a deal on where value will be in two years. They need to finance the value today.

“However, the banks are financing new projects where it makes sense, for example if schemes are 50 percent pre-let. So they are not out of the market.”

From a debt adviser perspective, Jonathan Jay, partner at London-based Conduit Real Estate, sees active lenders in the market. “There’s a common misconception that debt is unavailable or not accretive. That is not necessarily true.

“There is a genuine desire from many banks to do deals, although their leverage is lower, as they are focused forensically on income. If a deal has an interest coverage ratio of 2.0x, banks will likely quote. However, some banks are being told by regulators to reduce some exposure, driven by risk-weighted assets under the Basel Framework, so select banks are not able to refinance their clients.”

Jay acknowledges that some non-bank lenders are more active than others. “Some are in fundraising mode or have tapped out while they asset manage their existing loan books. But for others, it is a great time to create market share. So, while some have removed themselves from the market, replacement providers have filled the gaps.”

Kowalski agrees that liquidity varies by manager because investors are more discerning. “Much of my day involves investors calling to understand the underlying assets and the risk. That is a change. They are not just buying into an off-the-shelf fund. They are buying into individual credit expertise now, and recovery expertise should it go wrong.”

Less appetite for risk and higher pricing for senior loans means lending capital is likely to be concentrated towards the best real estate.

“The lending market, like the real estate market, has polarised,” comments Brown. “The greatest degree of liquidity will be in the assets where there is less underwriting volatility. There is an expectation that senior leverage will come down to manage interest coverage ratios, and alongside value changes, this is contributing to the ‘refinancing gap’.”

Lenders are willing to provide financing, debt specialists insist, but the terms on which they are prepared to lend are considerably different to 12 months ago.