LOOK AHEAD 2024: Federated Hermes sees a rocky ride ahead for underperforming assets

The firm’s European head of debt believes asset quality will be crucial for lenders as borrowers face refinancing pressures.

The head of property debt in Europe for US manager Federated Hermes predicts a turbulent 2024 for underperforming real estate assets, which he believes will struggle to attract financing as lenders and property investors become more discerning about asset quality.

Vincent Nobel, head of asset-based lending, said in the firm’s 2024 outlook report that, as higher rates add refinancing pressure on sponsors it is important for lenders to have high quality collateral. Properties which feel dated, are in need of refurbishment, or are in the “wrong” location will struggle to attract new financing, he added.

“This is therefore an important theme for next year; a continuing divergence between assets that can find buyers and lenders, and those that cannot,” Nobel said. “2024 may be another rocky ride for those investors holding assets that underperform in the eyes of an ever-more discriminating investor base.”

In April, Real Estate Capital Europe reported the firm had begun fundraising for its Federated Hermes European Real Estate Debt Master Fund – the firm’s first commingled European property debt fund.

The company will provide senior loans and whole loans across Europe with an average loan size ranging between €20 million and €60 million, at terms between three and five years and at loan-to-value ratios of between 50 and 60 percent. It is understood the firm is looking to raise up to €500 million from European institutional investors and aiming to start a full-scale fundraising campaign next year.

Nobel said that, going into 2024, the firm believes interest rates are nearing long-term “normal” levels, and added there is more clarity on the value real estate debt can provide as part of investors’ portfolios.

“Senior real estate debt portfolios continue to deliver income in line with underwriting, albeit with collateral that has lost some of its realisable value since those loans were made. However, with many senior loans having been made at modest leverage, the expectations are that impairments on senior loans should be minimal,” he said.

The firm believes its senior focused lending strategy will be insulated against both rate rises and decreases. “A reduction in rates will typically help the asset values of the properties that serve as collateral for our loans. Rates rises will increase the returns on our existing loans,” he said.

“Higher rates do, however, add refinancing pressure for our borrowers, who will have to repay our loans in due course with more expensive debt. This is not a problem when rates movements are modest, but the moves we have seen in recent times have not been modest.”