How do lenders view the current real estate lending environment?


A sharp rise in the rate of inflation has led to increases in interest rates in many major economies over 2022 and 2023, including the UK, the Euro Area, and the US. This has contributed to tighter lending conditions for commercial real estate, with credit becoming more expensive and loan terms becoming more stringent. CBRE estimates that the total cost of debt for senior lending on prime real estate in Europe has increased by 200-300 bps year-on-year.

Given the challenges facing the European real estate debt market, CBRE Research surveyed lenders in France, Spain, and the UK. We asked about their expectations for the debt market and lending activity for the remainder of the year. Respondents included banks, insurance companies and debt funds, with both larger and smaller lenders included in our analysis.

Uncertainty around future property valuations and rising interest rates were identified as the key concerns for 2023 by lenders in France and the UK. In contrast, rising interest rates and fear of recession were the top two challenges selected by lenders in Spain. These concerns are perhaps unsurprising, given how changing economic conditions and higher debt financing costs have impacted commercial real estate values over the last 12 months.

Yet, despite these concerns, many respondents still expected to actively lend on real estate through the rest of 2023. 80% of respondents in Spain indicated their willingness to allocate similar levels of funding to real estate as in earlier years, albeit with more restrictive terms. However, reduced investment activity could be a barrier to achieving such aims. In France, 50% of respondents anticipated a reduction in their origination volumes compared to last year, with this response more common among larger lenders.

67% of respondents in Spain and 75% of respondents in the UK and France confirmed that their underwriting requirements have become more conservative this year. Among the most common underwriting assumptions to see change are the loan-to-value (LTV) ratio and debt service coverage ratio (DSCR). Meanwhile, 80% of lenders in France have increased margins year-on-year for loans to core assets, with most applying a moderate increase (10-20 bps), though some have raised margins by over 20bps. Still, the impact of any increase in margins is likely to be overshadowed by that of rises in interest rates more broadly.

Figure 1: Majority of Lenders Applying More Conservative Underwriting in 2023

To what extent are you expecting changes to your underwriting requirements for real estate lending in 2023?

Our survey identified that appetite among lenders is stronger currently for multifamily, purpose-built student accommodation and logistics assets. In Spain, there has been a strong increase in interest for lending on hospitality assets too. Our results showed that ESG principles have become embedded in lending practices. Nearly all respondents stated that ESG criteria are part of their underwriting decisions. The results for France also suggested that a significant number of lenders would offer margin step downs for assets that met ESG criteria.

While the economic environment remains challenging, there is still appetite in France, Spain, and the UK to continue lending on commercial real estate assets. However, borrowers will need to adjust to a higher cost of debt and tighter underwriting requirements for the foreseeable future.

For any questions on local results, please contact Benjamin Pipernos for France, Miriam Goicoechea for Spain, and Steven Devaney for the UK.