In Europe, banks are still part of the refinancing equation

In January, AEW updated an earlier forecast on the real estate debt funding gap in the UK, France and Germany for the period 2023-25. The shortfall, which the Paris-based manager originally pegged at €24 billion in September of last year, grew to €51 billion in its revised estimate, reflecting the impact of lower interest coverage ratios on the availability of financing in those markets. 

Fast forward to today, and rates had since risen a further 150 basis points in both the eurozone and the UK as of press time. Meanwhile, loan maturities loom large in the region: according to London’s Bayes Business School, approximately 81 percent of all outstanding debt in Europe will come due during the next five years.

Although bank retrenchment is expected to be less of a concern in Europe than in the US, some real estate borrowers are looking at a range of lender types for refinancing assets. David Boyle, co-founder and managing partner of London-headquartered NW1 Partners, argues there is safety in numbers: “You can never have enough relationships on either the equity or the debt side.”

NW1, for example, has relationships with a healthy mix of banks for its investments in the region. But the firm selected a life insurer to finance its last-mile logistics program in Spain, where initial assets were purchased on an unlevered basis.

Similarly, pan-European manager Azora is looking to refinance a Spanish residential portfolio for which the firm originally borrowed €486 million from a European insurer and a mix of banks four and a half years ago. As the portfolio has since grown, Azora is currently in discussions with various lenders on a €640 million refinancing but has increased its dialogue with insurers in particular. 

“Due to the higher interest rates, the insurance companies have now more appetite to secure higher returns for longer terms,” explains Antonio López Bodas, head of capital markets at Azora. 

That said, banks are still part of the refinancing equation. “We have not found that the bank market is shrinking too much for smaller opportunities,” says Keith Breslauer, managing director and senior partner at London-based Patron Capital, for which the average loan size is €30 million to €75 million. “This debt has been available from a variety of lenders, including foreign banks with a presence in the UK, such as Leumi, and both traditional UK banks like Lloyds and challenger UK banks such as OakNorth.”

López Bodas also believes bank financing is still widely available for income-yielding, resilient and well-managed assets, but particularly for large-ticket-size financing deals. “The bigger you are, the better the terms you are able to get,” he says. “The number of lenders you can get with €600 million to be refinanced is much bigger than with €50 million, because many of them will not pay attention if you are smaller.”

Crunching the numbers

While sources say the availability of debt is not an issue in Europe, the increasing cost of debt on the back of record interest rate rises has had clear repercussions on loan terms. 

“I think margins feel about 25-50 basis points wider,” says Breslauer. “Due to a combination of the risk-free rate becoming a lot higher and a higher cap rate, the ‘all in’ cost of money has gone up significantly, although the pure margin aspect hasn’t increased that much.”

Daniel Köhler, head of European real estate treasury at Barings, says: “As a rule of thumb, and dependent on when the initial loan was entered into, we usually assume a multiplier between 2 and 3.5 for the new cost of debt, as the total of swap rate plus margin.”

Whether refinancing with a new or existing lender, borrowers are increasingly having to contribute more of their own equity to help bridge the gap to the senior mortgage. But this raises a host of questions for the borrower, says Boyle. 

“‘How much do I have to pay down the loan? How much more money do I have to commit to fund it? Am I putting more good money after bad? Am I going to see a return on this capital I’m putting into it to refinance?’ Those are the really difficult decisions being made right now.”