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Why 2020 was a test of resilience

Knight Frank’s debt advisory partner, Craig Wilson, examines the key trends affecting the real estate debt market.

The year 2020 will forever be remembered for covid-19. The initial uncertainty caused by the pandemic resulted in a period of dislocation in the global debt markets that lasted for several months. Many real estate lenders hit the pause button on new business to take stock and review the risk profile of their loan books.

As supply in the debt markets diminished, senior debt pricing increased by 25-150 basis points – depending on the lender’s source of capital and the resilience of the real estate sub-sectors they were lending into – and leverage dropped by 5 percent on average. Debt pricing began to soften in Q3 2020 and has remained largely stable, albeit at rebased levels, over the past six months, while leverage has stayed conservative.


Craig Wilson
Craig Wilson

There have been stark differences in the resilience of lenders throughout the covid-19 pandemic in comparison with the global financial crisis. Banks’ common equity tier-one capital positions are currently three times stronger than they were prior to the GFC. The additional regulatory capital requirements imposed mean that banks have benefitted from a larger buffer to absorb the sharp impact of the pandemic, thereby protecting the global financial system from catastrophic failure.

Furthermore, it is clear there is far more breadth and depth to the real estate debt market now than there was 14 years ago, with more tha 200 active lenders including clearing banks, investment banks, global insurance companies, overseas banks, challenger banks and debt funds. Our sources tell us the second half of 2020 and the start of 2021 has been the busiest time on record for many debt funds.


Another key feature of the real estate debt market has been the polarization of appetite across the various sub-sectors and a “flight to quality.” Lender appetite across the logistics and residential markets has been insatiable since the outset of the pandemic, due to the resilient nature of the income. As a number of lenders with dry powder to invest are chasing the same deals, debt pricing has tightened across these favored sectors.

Meanwhile, lender appetite in the retail and leisure sectors has been limited, with only a few pockets of liquidity for the strongest sponsors and most resilient assets. Food retailer-anchored schemes have remained attractive to lenders, but fashion retail-led schemes have been challenging to finance.

ESG finance

The ESG focused finance agenda truly emerged in the real estate debt markets in 2020 and will continue to gather pace. Green finance, via green bonds or loans, and sustainability-linked loans have become more common and will soon become the default option as lenders and borrowers seek to access cheaper sources of capital and contribute to their organizations’ own ESG targets. In September 2020, Aviva Investors provided a £154 million ($214 million; €177 million) senior loan to CLS Holdings, which was structured to include KPIs that are linked to sustainability targets, with a margin reduction of up to 10bps dependent on the borrower delivering specific targets.