RESEARCH • 1 March 2023

Cautious banks create opportunities for alternative lenders

"45% of outstanding commercial real-estate loans are expected to mature in the next two years, rising to 75% by 2026."


Against the current volatile macroeconomic backdrop, the lending community is likely to be more cautious in 2023, meaning the overall supply of debt finance will be constrained in the short term. Where debt is available, it will reflect the uncertain environment, i.e. lower leverage at a higher cost. 

The debt-finance market has evolved considerably since the last financial crisis, and we therefore believe this cycle is likely to play out in a different way to that which we experienced post 2008. Most notably, the average level of debt across the system (in terms of leverage) is much lower than going into the GFC [1] meaning extensive losses in the banking system and a large liquidation cycle are less likely this time round. 

The provision of debt finance is now more diverse, with more funds and direct investors active across the debt-capital market. The ability of dedicated lenders to respond to market opportunities, at speed, is likely to facilitate a faster process of price discovery for both debt and equity participants. In the short term, finance availability from traditional bank lenders will remain restricted as they assess risk exposures across their portfolio[2], meaning enhanced returns available to lenders who are able to step into the gap. 

Transaction flow for active lenders is likely to see a high level of refinancing enquiries as loans previously eligible for traditional bank debt now fall more squarely within the investment criteria of the alternative lenders. This will then be augmented by new transaction business as the underlying property markets reach clearing price levels, where the substantial amount of equity available is ready to commit to new purchases.

Debt levels lower than pre-GFC in Europe


Source: MSCI

Bank cost of funding on the rise


Sources: DRC Savills IM, Bloomberg (Nov 2022)

Using the UK market as an example, there is a significant volume of debt outstanding that will require refinancing. Circa 45% of the outstanding commercial real estate loans are expected to mature in the next two years, rising to around 75% by 2026[3]. Given the dramatically increased cost of debt, some well capitalised borrowers will opt to refinance by contributing fresh equity, while many others will be requiring debt from the market to fill the gap. The emergence of a funding gap in the UK will likely be significant and provide an opportunity for the non-bank lenders. 

In order to estimate the size of the funding gap, we must consider several elements that drive the bank-lending criteria. For example, elevated interest rates will put pressure on property interest coverage ratios (ICRs), with the current five-year Sonia swap rate of 4.6% and assuming 60% loan-to-value (LTV) resulting in ICRs at or below one across all sectors. In order to maintain at least 1.3x ICR (as most bank lenders require), property values will need to decline by 36%[4] on average across all sectors. At the current cost of CRE debt, and assuming £76bn of outstanding debt maturing in the UK over the next five years, only £49bn would be made available to facilitate refinancing. This leaves a funding gap of around £5bn per year (£25bn aggregated) to be filled by equity or non-bank debt. Similarly, In Europe, using the same methodology, we calculate the funding gap to be similar in size to that of the UK. We expect the German and French markets to require €6.2bn and €5.1bn respectively, between 2023-25[5].

This backdrop provides a golden opportunity for non-bank lenders, who have the requisite experience to deploy capital and capture attractive premiums for their investors. 

[1] MSCI (Jun 2022)
[2] DRC Savills IM, Bloomberg (Aug 2022)
[3] Bayes CRE Lending Report MY 2022 (Oct 2022)
[4] Bayes CRE Lending Report MY 2022 (Oct 2022)
[5] AEW – European Real Estate Debt Markets Re-Align (Sept 2022)



Mohamed Ali

Research Analyst, Debt