Real estate asset manager AEW has released its latest study on European real estate debt markets that reveals a €86 bn funding gap for 2025-27, a 13% reduction from the previous forecast.
This gap represents the shortfall in refinancing maturing loans originated between 2016 and 2023 across 20 countries.
Although margins and borrowing costs have decreased, loan margins vary across sectors. While office loan margins have widened, logistics and residential loan margins have tightened. Additionally, loan-to-value ratios are rising, and financial covenants are easing as lenders seek to boost activity and offer more competitive terms. Despite these improvements, refinancing legacy loans remains challenging due to historical declines in collateral values.
AEW's latest estimate suggests that nearly 13% of European real estate loans maturing between 2025 and 2027 will face refinancing challenges, down from 17% previously estimated. This improvement reflects easing conditions and updated data on loan maturities, original LTVs, and extensions.
Hans Vrensen, head of Research & Strategy Europe at AEW, commented: ‘Our latest and improved estimate of €86 bn for the European real estate debt funding gap confirms that refinancing challenges remain. However, the challenge is easing, in part helped by central bank rate cuts which have pushed down bond yields, swap rates and ultimately borrowing costs. As property yields have widened over the last two years, lower borrowing costs now make debt accretive for equity investors again. This should both help bring liquidity back to the investment market and allow collateral values on legacy loans to further recover – further easing refinancing challenges.’
Germany and France face the largest refinancing challenge, with 19% and 18% of 2016-23 loans, respectively, needing refinancing. The UK has the lowest share at 6%, while Italy and Spain are slightly below the European average of 13% at 12%. Additionally, debt-on-debt financing and unsecured debt from US banks and opportunistic funds have emerged as strategies to address the DFG.
Not all loans facing refinancing challenges will lead to defaults or losses. The impact on different sectors depends on factors like timing, collateral quality, and interest rate stress across various loan vintages.
AEW estimates that 7.1% of €700 bn in 2016-23 CRE loans are at risk of default, down from 7.5% in February. Projected losses have also decreased to 1.8%, lower than the 2.5% estimated in April and the 2.3% actual losses during the GFC.
Examining the different sectors, estimated losses for retail-backed loans in the 2016-23 vintages across the sector are near 6%, more than three times the overall average across all sectors, triggered by more significant and earlier collateral value declines since 2018. Office-backed loan losses are projected at 1.7%, just below the overall average, with all other sectors estimated losses below 1.0%.
