By Michael Delaney

Managing Director, Global Business Development

As we approach the end of 2024, there is a growing sense of cautious optimism among European lenders and investors regarding the capital markets and lending activities. This positive outlook, though modest, is significant after a period characterised by persistent external market risks.

Uncertainties, such as the timing and pace of interest rate cuts to election risk around the world and escalating geopolitical tensions in Ukraine and the Middle East, have previously created bottlenecks for investment and lending appetites. However, as these macroeconomic and election related uncertainties dissipate, liquidity is gradually returned to European markets. Notably, the recovery in European real estate finance is uneven, with varying paces across different regions, markets, and asset qualities, resulting in a bifurcated liquidity recovery.

The reduction of inflation back to a 2% target has enabled policymakers to normalise internet rates. According to Eurostat, euro area annual inflation fell to 1.7% in September, down from 2.2% in August 2024. This decline supported the European Central Bank’s decision to implement a 25-basis point interest rate cut, bring the rate to 3.25% in mid-October. Economists expect further cuts to follow. For example, Capital Economics has projected back-to-back 50 bps cuts in December and January, driven by a worsening outlook for economic growth and inflation across the euro-zone. In the UK, annual inflation also hit a three-year low in September of 1.7%, down from 2.2% in August, according to the Office for National Statistics (ONS). According to a Reuters poll of economists, the Bank of England (BoE) is forecast to cut the Base Rate – currently at 5.0% – in November. By autumn 2025, the UK Base Rate is forecast to fall  to 2.75%, according to Goldman Sachs’ forecasts.

For real estate, lower interest rates support improving valuations, which helps attract sidelined investors back to the market, improving price competition and narrowing bid-ask spreads. As rates continue to fall, improved market conditions compound the return of capital flows over time, simultaneously fuelling lenders’ appetite to refinance, extend acquisition finance, as well as investors’ confidence to transact. But this is likely to be a gradual effect. As markets recover at varying speeds, investors often focus on areas where asset repricing dynamics align with their strategies. In the UK, where asset repricing has largely been completed, investors are showing interest in core-plus to value-add strategies. Conversely, in Germany, where repricing is still in progress, investors with higher risk tolerance are pursuing opportunistic strategies, capitalising on potential discounts that remain available.

UK leading Europe’s market recovery

As 2024 has matured, political uncertainty has expired. The UK led Europe’s recovery with an early real estate repricing cycle in 2022, further supported by the stability of a decisive Labour election win in July, which boosted investor and lender confidence. The UK’s stable government and favourable market sentiment has bolstered strong lending activity in recent months, primarily driven by refinancing and loan-on-loan back leverage facilities for debt funds. London, in particular, is strategically positioned to attract international capital, surpassing Europe’s traditionally dominant markets of Germany and France.

While France remains resilient in the aftermath of June’s snap election, investors are wary of policy consequences of its deteriorated public finances, while Germany is the laggard of Europe in real estate repricing, although this status potentially suggests opportunities ahead for some participants.

Now with the US presidential election over, there remains a possibility of a fresh wave of US capital across the UK and mainland Europe. Some regional German banks are actively lending across Europe, signalling German lender optimism beyond their domestic market. However, some pfandbrief-funded banks, are still working through high exposures to US offices, while other German banks have ongoing German development scheme exposures.

German lenders have expressed a little disappointment over the low volume distressed loan portfolio sales to date. Markets are anticipating more asset and loan portfolio sales to follow, likely at discounts to carrying valuations, with investors and credit buyers waiting in anticipation.

Refinancing dynamics and sector appetite

The appetite for refinancing among banks and alternative lenders remains varied. However, throughout Europe, niches within the logistics and living sectors – such as private rental, student accommodation, and assisted living continue to attract significant interest due to strong fundamentals. In the logistics sector, advancements in technology have spurred demand for upgrading warehouses and logistics hubs, with a focus on supporting robotics, automation, and clean energy initiatives.

Prime assets benefit from competitive financing, with multiple term sheets from lenders focused on assets aligned with evolving sector-specific end-user needs. Southern European shopping centres, particularly in areas with a preference for in-person shopping, are seeing increased lender interest. Data centres also continue to attract demand, although some lenders treat assets as infrastructure rather than traditional real estate, limiting the appeal among some financing teams.

In the office sector, the divide between prime and non-prime assets persists. Lenders are increasingly prioritising high-quality, amenity-rich spaces that meet stringent r sustainability and energy efficiency regulations. A noticeable rise in financing requests for high-capex refurbishment projects reflects a pivot toward sustainable upgrades, particularly in major cities like London. This shift away from new developments is reinforced by renewed confidence in the primacy of office-based work, alongside growing sustainability requirements. Sustainability as a catalyst for capital allocation decisions could emerge as a prominent theme in the European office market next year. However, the demand for refurbishments contrasts with a sluggish construction sector, where inflated costs and low demand challenge pricing feasibility.

In both refinancing and new lending, extended credit due diligence is extending the financing process, amid intense competition for top-tier assets. Sponsors with well-positioned properties stand to gain from a robust refinancing market, as some lenders begin to report losing out on deals due to competitive pricing. Borrowers refinancing non-prime assets face tougher conditions, often needing to add equity to meet lower loan-to-value (LTV) ratios following adjusted valuations, particularly in sectors such as legacy offices, German logistics, retail, and development schemes.

Anecdotal reports from clients highlight high transaction volumes, reflecting growing momentum across financing and refinancing deals, particularly for prime assets. Lenders are steering clear of forced exits for non-prime borrowers. Instead, they prefer strategies such as short-term refinancing and equity injections to support a gradual recovery. Club deals and loan-on-loan structures have become standard, highlighting lenders’ adaptability. Debt funds are active in the market, with back-leverage compensating for fundraising constraints, while any CMBS market recovery could start with single-loan securitisations to test investor interest.

Conclusion

Into the final weeks of 2024, downward-trending interest rates are supporting a recovery in liquidity, sector-focused capital flows, and sustainability-led refurbishments. The outlook for European real estate remains cautiously optimistic, with liquidity growth and demand for sustainable assets expected to rise further. Regulatory pressures on banks to address non-performing loans, especially in Germany, may bring distressed assets to market. Meanwhile, excessive costs keep construction subdued, shifting focus to capex-heavy upgrades. Prime logistics and residential assets remain in demand, while secondary office and retail see selective interest.

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Michael Delaney, Managing Director, Global Business Development at Trimont, has 23 years of experience in commercial real estate finance with an extensive background in CRE equity underwriting, asset management and loan servicing.

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