European commercial real estate markets diverge in stuttering recovery

The pace of recovery in European commercial real estate markets varies widely by country and property sector, new research from Bayes Business School (formerly Cass) reveals.

The trend is outlined in the latest European Commercial Real Estate Lending report by Dr Nicole Lux, Senior Research Fellow at Bayes’ Real Estate Centre.

The deep dive into European real estate debt markets shows how underlying funding structures and links into the banking market are shaping the recovery of different real estate markets at a national and sector level. Market penetration by alternative lenders such as debt funds only reaches 10 per cent in European markets compared to 40 per cent in the UK.

At the end of 2024 new lending volumes showed a modest recovery from a generally poor performance in 2023 in key markets like Germany, UK, Spain, Italy and the Netherlands, while France is lagging behind in transaction volume and new lending activity. However, the French market had experienced a milder fall in 2023, when the UK and Germany both fell by more than 30 per cent.

Office and retail blues

Dr Lux said: “Aside from economic uncertainties, it is likely that some of the slower market activity is down to the high concentration of office properties in French investor and lender portfolios. These account for 44 per cent of French CRE debt compared to 23 per cent in the UK. Because it is expected that such property will require significant capital expenditure in the short to medium term, further repricing risk makes this property type unattractive.”

She added that retail assets, which have been struggling due to changes in consumer purchasing behaviour, are also over-represented in French investor and debt portfolios. UK lenders have been reducing their exposure to these two asset classes over the last five years and have increased lending to residential investments instead. Lenders in the Netherlands, Spain and Germany have historically had a higher exposure to residential lending.

The biggest divide remains on pricing for performing assets and distressed loans between potential investors (buyers) and lenders (sellers). The loan pricing of performing real estate assets varies between prime and secondary assets, with the latter being priced 150-200bps wider. Some of these assets struggle to find suitable loan offers at all. However, there is significant lender competition for the best-in-class assets which can attract loan terms under 190bps for a modest loan to value ratio of 55–60 per cent.

Debt funds are competitive with loan to values over 65 per cent and are increasing their lending capacity and loan size through back-leverage obtained from banks.

The wall of debt due to mature between 2025 and 2027 in Europe could disrupt markets and slow the pace of recovery, the report suggests. Maturing debt amounts to 79 per cent of outstanding CRE debt in the UK, 45 per cent in Germany and 43 per cent in France.

The German market has the longest average debt maturity profile, with 38 per cent maturing after 2030. That means potential problems take longer to become visible and also take longer to resolve.

Dr Lux said: “Some €260 billion of debt needs to be refinanced in Germany alone in the next three years. KPMG estimates a debt gap for German real estate of €77 billion by 2028. These are maturing loans which will not find refinancing offers.

Despite debt funds stepping up their lending capacity, 2025 is set to be a pivotal year for distressed debt transactions. The rise in loan defaults is expected to continue in the short term and the German non-performing loan market is growing.

Aparna Sehgal, chair of real estate and structured finance (UK & Europe) at Winston & Strawn LLP, noted the enormous potential of the growing alternative lending market.

She said: “We’re seeing so much interest from our clients in structuring day one loan-on-asset financings with back-leverage funding levers ready to be pulled for closing. It’s a win-win for debt funds and banks, and for borrowers and sponsors. We’ve never been busier structuring, implementing and closing.”

You can download a webinar about the report here.