Liquidity in Europe is back, but it is conditional

By Michael Delaney

Europe’s real estate financing markets are undergoing a pivotal transition, adapting to heightened risk and shifting global dynamics. While lending activity slowed in the second quarter—dampened by tariff uncertainty and geopolitical tensions—this pause has been brief. Investors and lenders are now reassessing growth prospects, interest rate trajectories, and underwriting standards, recalibrating their strategies to navigate a more complex market environment. As conditions evolve, fresh liquidity is returning to Europe, but it comes with new caveats and a sharper focus on risk management.

As monetary policy gradually eases, Europe’s relative macro-policy cohesion is drawing investor attention. Cross-border capital flows – deterred by volatile U.S. trade policy and increasingly unpredictable fiscal signals – are tilting toward jurisdictions that offer regulatory clarity, governance stability, and sustainability-led policy frameworks. Europe, while not immune to global headwinds, stands to benefit from this capital repositioning. Investors are directing capital toward assets and sectors that offer income resilience, tariff insulation, and structural policy alignment. Debt strategies are mirroring the shift, reflecting the same recalibrated risk lens now guiding equity allocations.

Europe is well-positioned regardless of how trade risks evolve in the near term. Should the imminent expiry of the 90-day U.S. tariff truce revive protectionist measures and retaliation, capital may tilt further toward Europe’s more predictable markets. Conversely, if global trade tensions ease, the result could be a broader resurgence in deal activity across both sides of the Atlantic. Over time, these relative advantages could prove transient, as perceived geopolitical risk premia dissolve and international dynamics normalise.

Lending activity trends

This macro backdrop is shaping lender behaviour in particular ways. In the first half of the year, the focus was on refinancing and financing core-plus assets with demonstrable income durability and sponsor alignment. Development remains largely out of favour. Sponsors are increasingly willing to absorb higher all-in costs in exchange for flexibility, while lenders are prioritising lower leverage, tighter structuring, and rigorous underwriting. Even in liquid segments, deal activity is characterised by scrutiny and a widening bifurcation between resilient and non-core sectors.

The return of traditional banks, particularly in core Western European markets, is spurring increased deal activity. Banks have re-entered with selective appetite, favouring well-capitalised sponsors, stabilised assets, and shorter-dated loans. Banks’ ability to offer lower margins has intensified competition with debt funds, particularly in best-in-class logistics, multifamily, and core office segments.

Mandate activity at Trimont reflects these dynamics. Performing loan mandates across its EMEA servicing platform rose 15% in the 12 months to Q1 2025, with particular growth in industrial, mixed-use, and land-backed strategies. By contrast, development lending fell modestly, reflecting the continued caution around development risk amid volatile construction costs and uncertainty over exit yields.

In many cases, sponsors are acquiring sites and income-producing assets now, often adjacent to logistics or urban mixed-use assets, with an eye on future development when construction conditions become more favourable. This is not a return to speculative risk, but a calculated bet on optionality. Trimont data reinforces this trend with land-backed loan mandates rising 133% year-on-year to Q1 2025, signalling that while ground-up development remains on hold, strategic land positioning ahead of the next cycle is already underway.

Capital stack engineering

Financial complexity remains elevated even as liquidity returns, with mezzanine, co-lending structures, and hybrid tranches becoming increasingly common to bridge valuation gaps and support faster business plan execution. Debt funds are increasingly relying on back leverage, warehouse lines, and repo-style credit to enhance capital efficiency. These strategies allow debt funds to remain active lenders and amplify returns during periods of fundraising constraints. However, this kind of capital stack engineering also increases structural complexity, which can heighten fragility under stressed scenarios. The layering of additional leverage can obscure underlying asset risk and may narrow refinancing options if exit timelines slip, valuations shift, or liquidity tightens. As a result, regulators and senior lenders are starting to scrutinise funds with back leverage more closely, where risk visibility is compromised.

Where capital is concentrating

Across Europe, lender preferences continue to converge around assets that offer both income durability and long-term optionality. Geographically, appetite is broadening. While the U.K., France, and Germany remain dominant, Southern European markets – including Spain, Greece, and Portugal – are capturing increased attention from both sponsors and lenders, who are drawn to the region’s recovering economic growth and nearshoring trends. Logistics, affordable housing, multifamily, and mixed-use urban formats remain in favour, supported by resilient tenant demand, alignment with demographic shifts, and compatibility with sustainability-led investment mandates.

However, even within these favoured sectors, scrutiny is intensifying. Covenant packages are tightening, sponsor alignment is under closer examination, and ESG performance now directly influences pricing. Lenders are rewarding sustainability-linked strategies with better terms, while laggards face higher margins and reduced liquidity. Regulatory momentum and investor expectations are reinforcing a cost-of-capital advantage for sponsors with credible sustainability plans, while penalising those without.

Meanwhile, traditional office, legacy retail, and speculative development continue to face structural headwinds. Lenders remain cautious where income visibility is weak or assets lack flexibility to adapt to occupier shifts. Transitional office schemes with strong decarbonization potential and credible capital expenditure plans can still attract capital, particularly in prime locations, but they face tighter structuring and offer only modest pricing advantages.

Outlook

Liquidity in real estate finance markets has returned – but it is conditional. Financing volumes have rebounded, aided by monetary easing and the re-engagement of traditional banks. But confidence remains fragile, and refinancing risk looms large. Many challenged loans have already been extended or restructured, but a sizeable maturity wall lies ahead. How well lenders absorb this pipeline will test their ability to look past macro noise and underwrite viable assets.

Refinancing will remain the dominant theme across key markets, with new origination focused on sponsors with predictable income, governance strength, and sustainability-led business plans. Capital is being deployed with precision – across loan formats and sector niches. Distress remains contained, but the outlook will be shaped by refinancing timelines, interest rates, market resilience, and lender liquidity. Execution, not exuberance, will define the remainder of 2025.

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