AUTHOR: ROHAN CAMPBELL
We recently held our European Lawyers Summit at our offices in London. The event was a great opportunity to catch up with some of our key connections across our preferred firm network and included attendees from Belgium, Denmark, France, Germany, Ireland, Italy, Netherlands, Norway, Poland, Spain and Sweden. On the agenda was a discussion around the opportunities and challenges in the European REF market for 2025.
As one would expect the well publicised funding gap was at the forefront of most people’s minds. There was no doubt that there remains a big challenge for the industry in meeting the wall of finance required. In discussion, there were some key trends and themes that we returned to at various points:
Availability of capital
Sentiment was cautiously optimistic about the availability of capital to meet the refinancing demand. The general view was that there would be continued and accelerated growth of non-bank lending, particularly in the UK market but also expectation of increased activity of these lenders in Ireland and France. Whilst bank lending was still dominant in other European jurisdictions, the general view was that there would be further opportunities for non-bank lenders to increase their market share across jurisdictions, especially in view of the potential impact of a tighter regulatory environment impacting the ability of traditional banks to service direct lending into real estate.
With the growth on non-bank lending in the market it was anticipated that there would be greater regulatory focus on that part of the market in future and also greater scrutiny on the growing inter-relationship between traditional banks and these alternatives, for example, in the context of back-leverage structures.
Uptick in transactional activity
Based on the current data, it appears that investment is returning to the European real estate market. This is driven by a mixture of factors. Various market commentators have suggested that funders are going to have to take a harder line on existing transactions which should increase the flow of deals in the market and allow greater certainty on pricing. In addition, whilst there remains material uncertainty on where rates will land, the general consensus is that there will be some reduction in rates and less volatility in the medium term. Returning or increasing demand and constrained supply in some sectors is creating greater appetite amongst investors, developers and funders. Diversity of capital now available in the REF sector is also helping to create optimism that there is support available for value add, repurposing and some transitional business plans, noting however, that there remains sharp focus on the mix of asset type, location and sponsor side expertise and funding required to unlock these opportunities.
Sustainability and Net Zero
Delegates were in agreement that sustainable or green finance solutions and the impact of Net Zero targets continue to be key themes for the REF sector. For both sponsors and lenders active engagement with sustainability linked principles and transitional business plans was seen as essential in order to continue to attract capital, meet ever more challenging regulatory requirements in the real asset sector and to overcome the issue of stranded assets.
It was noted that in most jurisdictions the risk of stranded assets was coming to fruition. Assets in need of significant upgrading or repurposing would only be capable of rescue in certain circumstances. For example, existing commercial buildings which did not benefit from being in sought after locations or otherwise having the related and necessary infrastructure surrounding them to facilitate a repurposing, for example, to residential use, would struggle to attract capital. It was felt that it was likely that government support and perhaps partnerships between the relevant public authorities and private investors and developers would be needed to activate these opportunities.
Distressed opportunities
2024 was supposed to be the year when distressed real estate opportunities really began to flow. The consensus amongst our restructuring delegates was that this had not yet materialised across all jurisdictions. In large part, the reason for this was that lenders had continued to support their sponsors with extensions and temporary softening of covenants. Whilst most were of the view that attitudes in the lending community were hardening, there was no confidence as to the speed with which that will feed through to a material increase in deal flow.
That said, it was noted that defaulting loan rates were increasing across the market and many of the extensions that had been granted were short term (e.g. 1+1 or similar). Sponsors and funders with capital to deploy should have reason to hope that there will be more opportunities to transact this year.
In conclusion, 2025 should see an improving picture for the REF market in Europe. We look forwards to continuing to work collaboratively with our preferred firms across the region to support our clients in navigating the year ahead!