Thought of the Week

Which sectors of the UK real estate market face the biggest debt refinancing challenge?

February 15, 2024 3 Minute Read

By Jen Siebrits Steven Devaney

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Refinancing hit the headlines last year as the combined impact of lower capital values and higher interest rates made it more challenging for borrowers wanting to refinance real estate loans. Funding gaps emerged in cases where the amount of debt now available was less than the amount originally borrowed.

Funding gaps will also exist for many loans due to mature in 2024. At a European level, we estimate the funding gap will total €114 billion from now up until 2027 – this takes into consideration how interest rates and property values might change. The UK accounted for €14 billion (or roughly 12%) of this total and this gap is not spread evenly over time or across property types. 2024 will be a key year as there is only limited scope for our expectations of recovery in the UK to shrink the funding gap. Offices account for just over half of the estimated funding gap in 2024. They also account for c. 50% of the overall gap, while multifamily accounts for c. 30%, though this could fall significantly with lower interest rates and sustained rental growth in the multifamily sector. The gap is much smaller for industrial & logistics, but it rises at the end of the period based on loans made just prior to the market downturn.

While funding gaps will lead some investors to sell assets in order to repay debt, other cases will result in borrowers injecting more equity, finding other sources of capital, or negotiating extensions for their existing loans with the aim of resolving the situation later. While conditions have been challenging, there are signs that confidence is returning among UK investors and recent falls in UK long term interest rates may also alleviate pressures.

Figure 1: Projected debt funding gap for UK real estate investments (£bn)

Source: CBRE Research