Real estate funding in 2023

Funding is tightening, and rates are rising, although increased competition among lenders may soften some of the impact. Lenders are likely to become more discerning about the asset classes they lend against in the coming year, with quality, location, liquidity and ESG credentials becoming more important than ever.

For banks, regulatory capital rules have tempered loan-to-value ratios and the riskiness of lending, shoring up capital and consequently placing us in a better position than in the run-up to the global financial crisis.

Lenders are also more aware of reputational considerations when deliberating on actions where actual interest and leverage covenants drift towards their contracted limits.

The real estate sector is highly dependent on lending markets. At the time of writing, Basel regulatory counter-cyclical buffers are due to be increased in 2023 in some countries, and this could encourage a refocus on core investment. However, the expected economic turbulence could delay some of these buffer increases.

Over $1.1trn of real estate assets were traded globally in 2018, and many of those with leverage will be due for refinancing. In locations including Europe, where swap rates have seen marked increases from 0.31% average in 2018 to 2.70% at the time of writing for a 5-year swap. This could lead to some increase in disposals as well as equity injections and potentially new lenders to the market.

For more on the financing outlook for 2023, you can read interviews with our Knight Frank experts:

- Lisa Attenborough, Head of Debt Advisory at Knight Frank 
- Emma Winning, Partner at Knight Frank Capital Advisory.