To Bridge Europe’s Refinancing Gap, Property Owners Should 'De-Risk' Their Assets

Across Europe, commercial real estate is facing a refinancing gap. Borrowers are facing high interest rates, and lenders are reducing the amount they are willing to lend. 

To smooth the refinancing process, property owners should de-risk their portfolios by kick-starting technical due diligence early, Hollis Director and Head of Technical Due Diligence Michael Smyth said. This will put them in the best position possible and save time further down the line.

“In a tough market, anything that can de-risk an asset is of value,” he said. “In the past, a borrower might have several interested lenders and options, but often today that is reduced. Having a robust set of information that can help due diligence pass smoothly will reduce the risk of a refinancing deal falling to pieces.”

A significant proportion of real estate companies face refinancing. The collapse in property values since 2019 combined with affordability pressures have resulted in a gap worth €51B between what European real estate companies need and what is on offer over the next three years. For a property owner to bridge the gap and secure the financing it needs, its business needs to be in good order. 

In the last few years, real estate consultancy Hollis has worked with a growing number of property owners keen to de-risk their assets to secure capital. More property owners are seeking refinancing surveys, as well as pre-acquisition investor and vendor surveys. 

In 2013, 20% of Hollis' building surveys were vendor reports. By 2016, this had increased to 30%, and last year it was 42%.

Hollis’ technical due diligence team works closely with lenders and borrowers to help all parties understand what they need to do to ensure portfolios are as attractive as possible, Smyth said. 

“Technical due diligence can flush out many of the issues that a lender might have with the portfolio,” he said. “It takes the heat out of the process when the time comes to apply for finance.”

Starting due diligence early also counters another challenge that a property owner may not be aware of, Smyth said: The process can take much longer than it used to be. Even though a due diligence team can be on-site within five days of being instructed, it isn't always possible to secure every specialist required to satisfy the due diligence required by lenders. 

Hollis has in-house expertise and brings in specialists to provide additional necessary support, Smyth said. The lending industry’s new focus on sustainability can require an enhanced level of technical expertise. Many lenders now take into account factors such as energy-efficiency and environmental impact, but finding a consultant who can carry out these services can take time.

“We have seen due diligence reviews grow arms and legs in the last few years as buyers, sellers and banks are looking to de-risk their investments,” Smyth said. “At Hollis, we have in-house expertise on not only technical due diligence but mechanical, engineering and plumbing, ESG reviews, Carbon Risk Real Estate Monitor analyses, EPC improvement reports and climate risk assessments. Of course, all of this additional reporting takes time and should be factored into the process from the start for the best results.”

The development of the EU taxonomy has focused lenders' attention on climate risk assessments, he said. Hollis follows the guidance set out in the EU taxonomy to review climate risks and provide adaptation and mitigation recommendations as a way to de-risk an asset.

Specialists may also need to be brought into the process to look at cladding, notably facade consultants and fire engineers, Smyth said. Since the Grenfell disaster, fire safety has become a top concern, but limited numbers of appropriately experienced engineers mean lead times can be in excess of eight weeks. 

“It’s time-consuming to open up a facade, and it can lead to a difficult conversation with a tenant,” he said. “A protracted process involving a lot of negotiating about pavement rights and disturbing tenants can be frustrating for borrowers and lenders.”

While addressing technical due diligence early may not seem a priority, it is worth it, Smyth said. As the refinancing gap threatens to widen, de-risking an asset now could pay dividends down the line.

This article was produced in collaboration between Hollis and Studio B. Bisnow news staff was not involved in the production of this content.

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