European real estate continues to operate against a challenging backdrop. Higher financing costs, repriced assets and subdued transaction volumes have created pressure across the market, while owners, investors and lenders continue to assess when, and how, activity will pick up.

Yet the next phase of the market may look different from previous cycles. Rather than being driven principally by conventional acquisitions and disposals, it is expected that refinancing, recapitalisation and restructuring will play an increasingly important role.

Drawing on conversations at the GRI Europe Conference, PERE Europe Forum and EXPO REAL, we explore some of the key themes shaping the refinancing landscape and what they could mean for sponsors, lenders and investors.

Refinancing is moving centre stage

A significant amount of existing real estate debt was put in place when asset values were higher and borrowing costs considerably lower. At EXPO REAL, figures shared by Patrizia suggested that values for certain assets are now 20–30% lower than when much of today's debt was fixed between 2015 and 2020, while interest rates are now 300–350 basis points higher.

As those facilities mature, owners will need to consider how best to address the gap. However, this does not necessarily mean assets will come to market.

Instead, there is an increasing focus on refinancing and recapitalisation as sponsors look for ways to retain good assets rather than dispose of them at current valuations. This could result in a greater volume of refinancing, restructuring and recapitalisation activity as existing debt reaches maturity.

For sponsors, the question is therefore becoming less about whether an asset can be sold and more about identifying the right capital solution for it.

Fund-life pressures are creating another catalyst

Debt maturity is not the only factor driving activity.

Platforms acquired between 2017 and 2022 are increasingly approaching the end of their fund life, creating pressure for managers to return capital or consider how investments can be extended.

This creates a potential tension. The optimum time for a fund to exit and the optimum time for an underlying asset to be sold will not always coincide.

Where managers retain conviction in an asset but current market conditions do not support an attractive disposal, other options become increasingly relevant. These could include recapitalisations, secondary transactions, continuation structures and other liquidity solutions.

As a result, debt maturity, fund terms, investor expectations and potential exit routes need to be considered together rather than in isolation.

Capital structures are becoming more complex

The refinancing landscape itself is also changing.

Refinancing is no longer simply a question of replacing one traditional bank facility with another. The growth of alternative sources of debt and increasingly sophisticated capital structures has created more options for borrowers, but with that flexibility comes additional complexity.

Back-leverage and the exposure of lenders to other participants within a financing structure are among the issues attracting increased attention. This places greater emphasis on understanding not only the headline terms of a financing but also the relationships between the different parties within the capital stack.

For borrowers and sponsors, transparency around the wider capital structure can therefore be an important consideration. For lenders, careful consideration of credit, intercreditor, subordination and enforcement arrangements will remain important as financing structures become more layered.

Investors have a wider range of options

The changing market is also creating more potential routes to liquidity.

The traditional choice between selling an asset and continuing to hold it is becoming less binary. Depending on the nature of the asset, sponsor and fund structure, refinancing, recapitalisation, GP-led transactions, secondaries, joint ventures and platform-level transactions can all offer potential alternatives.

Capital remains available, but investors are becoming more selective about where it is deployed. Across recent market discussions, there has been an increased focus on specialist expertise, alignment between managers and investors, operational capability and the ability to demonstrate how investments will generate sustainable income and ultimately deliver returns.

For managers and investors alike, retaining flexibility over both financing and exit options is therefore becoming increasingly important.

Preparing before maturity

Against this backdrop, early preparation will be key.

Sponsors and borrowers approaching a refinancing will need to consider the performance and value of the underlying asset alongside the terms of existing debt and fund documentation, potential equity requirements and the interests of different participants within the capital stack.

It will also be important to consider the alternatives available if the preferred refinancing or disposal route cannot be achieved.

Beginning these conversations early can give both borrowers and lenders more opportunity to assess the available options and put an appropriate structure in place, rather than allowing an approaching maturity date or fund deadline to dictate the outcome.

What comes next for European real estate refinancing?

The refinancing wave should not simply be viewed as a wall of maturities that the real estate market needs to work through.

It has the potential to influence who owns assets, how they are financed and the structures through which capital is deployed. Conventional investment transactions will continue, but over the next phase of the cycle, an increasing amount of activity may take place without the underlying asset changing hands.

For sponsors, lenders and investors, maintaining sufficient flexibility to refinance, recapitalise, restructure or sell will be an important part of navigating the next stage of the market.

To discuss any of these themes and what they could mean for your business or investment strategy, please get in touch with Nick Mumby, Madeleine Clarke or Tom Pringle.