Bayes: 2023 toughest year for financing real estate in Europe

2023 is shaping up to be one of the toughest years for financing real estate since 2008/09, according to the new Bayes European Commercial Real Estate Lending report, published today.

Nicole Lux, Senior Research Fellow, Bayes Business School

“The European debt market is seeing its most difficult year post the Global Financial Crisis, and we expect that more distress is yet to come due to the longer term debt maturities in the European market,” said Nicole Lux, senior research fellow at Bayes Business School and lead author of the report.

The report brings new insights to the European real estate debt markets, and the authors have found that financing activities are currently advancing at subdued levels, accompanied by elevated loan costs. In particular, it shows that real estate transactions have dropped by 61% year-on-year and the colossal €2 trillion CRE debt market is running at a sluggish pace when it comes to loan refinancing.  

Some large transactions are receiving media attention, showcasing the diligent efforts of the banks to address these challenges by providing solutions. Recent examples include the €600 million loan to refinance the Eindhoven High Tech Campus in the Netherlands, and Oaktree’s distressed €99.6 million of mezzanine debt at 6% for the approximately €700 million purchase of the Highlight Towers in Munich.

However, despite these high-profile moves, the difficulties for the small to medium-sized investment market tend to be overshadowed. 

Securing financing is particularly arduous for investors dealing with mid-size assets, secondary cities or locations, and development projects, Lux said: “This challenge is exacerbated if the asset category is perceived to be non-resilient for the future.”

Loan-to-value (LTV) ratios for new loans have markedly decreased, with many senior loans being offered at 50% LTV or even lower. In general, loans with LTVs up to 60% are typically priced in the range of 5% to 5.9% for a five to seven-year term. However, any whole loan exceeding 70% LTV is subject to significantly higher interest rates, ranging from 6% to 8% for prime assets and 7% to 10% for less desirable ones. 

The pricing of bonds did not offer any discernible advantage. In the first half of 2023, a total of €8 billion worth of new bonds were issued in Europe. Of this, €2.7 billion was allocated to logistics, €1 billion to retail/shopping centres, and the remaining funds were directed towards diverse investment strategies.

The most favourable pricing was attainable for long-term bonds (exceeding 15 years), which carried an average coupon rate of 4.2%. Bonds rated at a minimum of single-A achieved an average coupon rate of 4.5%.  Green bond issuance now accounts for 20% of the European market, but only 4% in the United Kingdom.