Embracing change to win in real-estate financing 

The commercial real estate finance market has seen many changes in the last few years and this continues to be the case in an ever-evolving market. Interest rates remain high (relatively speaking), however they have stabilized to give greater clarity on future expectations. Rising capital values in certain sectors have also given some breathing room on tight LTV’s (loan-to-value). The European real estate market enjoyed a strong 2024 with CBRE reporting that total investment climbed to €206 billion, marking a 23% YoY increase. The two largest markets (UK and Germany) both enjoyed over 20% investment volume gains.

This joy appeared to be short lived however, with the latest market ‘shock’ coming off the back of the tariffs announced and put in place by the current US administration. The Commercial Real Estate Finance Council’s  Sentiment Index reported a circa 30% decline for Q1 2025 against the previous quarter. This represents the second-largest drop on record, surpassed only by the onset of the pandemic at the start of 2020.

So, where does that leave the commercial real estate finance market for the rest of the year? 

Challenges …

The CRE lending market faces a significant refinancing risk, with over €300bn due to be refinanced by the end of 2026. This could lead to a substantial funding gap as companies grapple with rising debt repayments on loans secured during the low-interest rate period.

Within this, there remain sector-specific challenges which are markedly pronounced in the office sector. Workplace transformation and the shift to hybrid working have pushed vacancy rates up and consequently led to the down-valuing of office properties. It is widely reported that the UK office sector has seen a decline in valuations by over 20% since mid-2022 and this is putting pressure on both lenders and borrowers.

This fall in valuations, reduced transaction volumes and higher interest rates has led to squeezed covenants. This cocktail of trends has meant that average LTV’s have risen from around 55% pre-2022 to 64% by the end of 2024 according to CBRE; elevating the refinancing risk in the market. 

… and opportunities for lenders 

Where there is change, there is opportunity. There are many highlights within the traditional CRE market including the resilient logistics segment and interestingly the hotel sector was the big 2024 winner in Europe; up 70% YoY according to BNP Paribas.

With the rapid growth in technology and AI, emerging sectors such as data centers are driving market growth potential. Savills are predicting a 21% increase in power capacity required across Europe by 2027 which will require significant capital investment and remains attractive for borrowers with stable yields of 5-6%.

Underpinning all of this is the requirement for attractive and flexible funding options; which is where traditional lenders see competition from private credit and alt-lenders. The Property Forum highlights this particularly in the mid-market segment, for loans between €30 and €75 million where borrowers benefit from tailored financing models that traditional banks cannot provide.

If viewed not as direct competitors though, the rise in alt-lenders can bring benefits to the banks as well. It opens up their options in deal structuring for example, with the bank providing the senior debt tranche and private credit funds taking mezzanine or preferred equity. It also further promotes the increasingly popular originate-to-distribute model that many banks employ; reducing their balance sheet reliance. 

Harnessing innovation  

With the large amount of internal and external data available to lenders now, it is imperative that they use this fully at all stages of a deal – whether this is modelling cashflows at origination or using comparable market evidence in their monitoring to watch for any signs of deterioration.

When you consider that every minute is critical in a distressed scenario and the number of options available to a lender decreases in direct correlation with time elapsed; surely you would want to have real-time information to base your decisions on? Ultimately those lenders that adopt and adapt their approaches will be the long-term winners. 

At SAP Fioneer we have developed our Credit Workplace solution which is tailored specifically for the needs of the experts managing your real-estate lending. Our solution supports the entire credit lifecycle for commercial real estate financing including origination and underwriting, credit risk and lifecycle management; as well as loan servicing. Please get in touch with us to learn more about how our real-time CREF solution can help you navigate 2025 and beyond.  

Author: Jamie Lait, Solution Design Lead Commercial Banking