Debt Market Snapshot

Market Summary

The economy has continued to grow this year and is expected to continue to do so into next year, according to the ONS and Bank of England, who forecast 7.25% and 6% annual growth this year and next. However, this positive outlook is tapered slightly by increased concerns over labour shortages and inflation, which is increasingly being factored into forecasts, and which could have a significant impact on the market.

The CRE market has benefitted from the improving economy as well as from the increasing number of people returning to their offices after a prolonged period. The City is at its busiest since pre-Covid and the West End is also seeing an increase in footfall. Sentiment has picked up; however, this uptick has not been equal across the market. We continue to see increasing demand and positive outlooks for industrial units, data centres, elderly care facilities and in the multi-family sector. According to Savills, take-up of industrial units of 25.1m sqft in H1 was the second highest on record. Retail units, however, continue to struggle. While expectations improved slightly over the last quarter, RICS rental expectations suggest there will be more struggles for the sector, especially in secondary retail units.

The CRE lending market has also had a very strong first half of the year. The latest report from Bayes Business School found new lending in the UK in H1 amounted to £23.3bn, higher than at the same point in 2019. Lending activity was particularly resurgent among lenders with smaller balance sheets, with smaller balance sheet lenders accounting for 44% of new lending, nearly half of which was used to re-finance loans from other lenders. While the lending market remains competitive, the report found margins for prime office loans rose by 12bps in the first 6 months of the year while prime industrial margins rose by 22bps. Average LTV ratios remain at a conservative 56%.

Debt Funds and Alternative Lenders Remain Busy

Banks are returning to the lending market and remain the largest lenders in the UK, however, they continue to be very selective on asset class, predominantly focussing on ‘beds, sheds and meds,’ with a preference to support lending for existing clients or sponsors with very strong track records.

In the alternate lending space, we continue to monitor the frequent new entrants to the market. A report from Prequin found the number of real estate debt funds in the market increased from 117 to 144 over the course of last year, and this number is only increasing. In the UK, debt funds were the second strongest lenders in H1 of this year, providing 24% of new financing. Some of the new debt funds have specific credit strategies, targeting particular asset sectors or jurisdictions, whilst others are broader and can consider most asset classes across Europe. In parallel, established debt funds and alternative lenders continue to raise further capital to lend in the market. Some reports predict that non-bank lenders will account for 40% of CRE new loan origination over the next 2 years. This has created an extremely competitive lending market, where lenders can be more flexible and accommodate value-add strategies and/or provide higher leverage than banks.

Inflationary Concerns

Inflation has increased sharply to 3.2% in the UK, (the highest figure in almost a decade), pushed up by higher food and restaurant prices initially but now most critically by rising energy prices, with further upward pressure from wage inflation as a result of labour shortages, which are likely to continue to have an impact in the medium term. It is hoped the closure of the Furlough Scheme at the end of last month will ease the pressures on the labour market slightly, with job vacancies hitting an all-time high in the last 3 months.

While the ONS said the rise in inflation was likely to be temporary, some economists are suggesting that inflation is set to head even higher to 4.5% or even 5% by Christmas, before slowing sharply next year. There is certainly a risk that higher inflations will gradually become more embedded in expectations.

The rise in inflation also brings about the increasing risk of a rise in the Bank of England base rate in order to bring inflation back down towards their 2% target. There is, therefore, some concern that a rate increase would damage confidence that is driving corporate valuations, consumer spending, and CRE asset values. However, the Bank of England has acknowledged that its previous projection for consumer prices was too sanguine. Despite upgrading peak inflation to 4%, it has continued to take the view that inflation will gradually return to the 2% target within the forecast period; with the headline rate expected to peak in the first quarter of next year.

Spotlight: ESG

ESG strategies are fast becoming essential. We are now seeing an increasing number of large institutional lenders as well as small and mid-cap credit funds developing sustainability strategies and incorporating sustainability factors into their decision-making.

There is currently no ESG-related regulatory obligation on banks, although that could change in the next few years and many of the large banks and insurance lenders we speak to are aiming to get ahead of the curve and establish robust ESG strategies. The large banks and insurance lenders are very focussed on this and as institutions feel they have a responsibility to drive education in this space. Many of their clients will not yet be focussed on ESG and will view it as something that is ‘coming down the line’ and therefore these lenders are educating but also aiming to incentivise CRE clients through the development of ESG-linked products.

In the credit fund space, a large driver for embracing ESG in a big way, has been the motivation of LPs. Investors are asking more and more of the platforms they invest in when it comes to sustainability, and these platforms have to adapt in order to continue to attract the same levels of investment. According to Morningstar, ESG funds saw an 84% quarter-on-quarter rise in inflows the Q4 of last year, and this trend is causing existing funds across sectors to introduce ESG criteria and look to re-model themselves to fit in to this investment trend.

Very broadly, this will mean incentivising clients to meet ESG targets through margin adjustments. We have seen a number of high-profile examples of green loans, RCFs and bonds, mainly for large generic corporate deals – but the challenge is how to create a bespoke product for CRE; how to benchmark assets, measure performance and to sensibly incentivise borrowers for meeting targets that are achievable but not too easy or just meeting basic regulatory requirements.

There are also other independently certified measures such as BREEAM and NABERS which measure the sustainability performance of a building in-use but one of the current limitations is insufficient data – many borrowers are not preparing ESG reporting to the degree needed so it is likely to be an iterative process.

We have also spoken to small and mid-cap credit funds who do not have the same drivers yet are also focussing on ESG initiatives when considering new mandates, and in cases offering ESG incentives – for example, a 25bps margin reduction once 90% portfolio had reached an EPC target.

Similarly for valuations – as more data becomes available around environmental risk and the ESG performance of tenants, then there should be a premium for sustainable assets. Many valuation teams within surveying firms are considering ESG as a factor when undertaking valuations. As a combination of these factors, borrowers could benefit from sharper margins and capital value increase.

It feels like ESG factors will quickly permeate the whole CRE market and are here to stay.

Westfort in the Press

Real Assets Media

Deepak Drubhra shared his thoughts on the current debt finance market during the European Debt Finance & Investment Briefing organised by Real Asset Media.

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Sanne Webinar

Richard Herring joined a panel of industry experts to share his insights on the ‘new normal’ and how debt fits in with the future of UK Real Estate in a virtual event, organised by Sanne.

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Debt Funds Take Centre Stage

Deepak was joined by members of the Sanne team to discuss the reallocation of capital from equity investments to credit and the resulting rise of alternative lenders in Europe.

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REC Debt Advisors Guide

Westfort Advisors were featured in Real Estate Capital’s latest Debt Advisors Report as part of the Debt Advisers guide listing details on the leading real estate debt advisors.

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Recent Activity

A high level overview of some of the deals Westfort have looked at over the last quarter

Spanish Resort Hotels

We are in the process of securing acquisition and capex finance for a portfolio of leisure hotels in Spain as investors look to capitalise on dislocation following the pandemic and the expected market recovery.


We are currently in the middle of an equity raise for the acquisition of a mixed portfolio of income producing PBSA assets and ground up development opportunities in key student cities across the UK.

German PBSA

Westfort recently closed the re-financing of two PBSA blocks in Germany including a capex facility for refurbishment at a high LTC, taking advantage of capital value increases since purchase.

Supported living

We have begun financing a portfolio of supported living accommodation for vulnerable adults in London. These properties fulfil an important social purpose, which can translate to access to pools of finance focused on ESG.

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Debt Market Snapshot

Market Summary

The banking market has largely seen a continued shift away from consumer focussed assets; in particular to sectors that have been less impacted by Covid-19, specifically residential investment and logistics/warehousing.

Across the board, an increase in Risk Weighted Assets and re-evaluation of risk ratings has driven increased banking conservatism, with a noticeable flight to high quality, core assets, at a maximum 50% LTV and mainly for existing clients. There are of-course exceptions but, anecdotally, there seems to be a general migration of lower-rated loans (both new originations and refinancings) from banks to the alternate lenders. Despite this, a funding gap is likely to persist.

A report by AEW has estimated the UK debt funding gap will reach £30bn over the three years to 2023, with half of the outstanding loans being in the retail sector. This is the result, not only of restricted appetite from traditional lenders, but also the falling asset values seen in retail (£9.5bn) and alternative assets (£13.5bn) such as care homes and hotels.

The alternate lending market will continue to grow to meet the surplus demand. The latest INREV report found that debt funds raised a record €32bn in 2020 for global real estate with returns for these funds averaging 7.7%, illustrating the profile of deals these funds will compete on. A second report from AEW has estimated non-bank lenders will account for 40% of commercial real estate new loan origination in Europe over the next 2 years. While this was a trend seen pre-Covid-19, it has certainly been accelerated as a result of the pandemic.

For existing loans, where covenants have been waived and/or maturities extended, it is likely that lenders will be less willing to extend forbearance, especially as moratoriums are lifted, giving landlords a greater deal of control over asset performance. The approach is likely to differ depending on the sector, with wholesale forced sales unlikely and lenders cooperating with sponsors where possible. However, there is an acceptance that a long-term solution will need to be found that reflects the viability of the assets in question. Where asset values have fallen this will mean either paying down the loan or re-pricing to reflect higher leverage.

It is worth noting that the trend of short term maturity extensions in 2020 will likely result in a ‘bottleneck’ of refinancings in 2021/2022.

The successful roll out of the vaccination programme has so far led to a positive shift in market sentiment and a general increase in market activity. While there is limited data for 2021 yet, JLL reported £19.4bn was invested in UK real estate in Q4 of 2020, a 6% increase from the previous year and making up over 45% of annual investment. With roll out of the vaccine appearing relatively successful in the UK compared to other countries, this may filter through to increased transactions, particularly from overseas investors. However, it may be that we do not see the real impact until later in the year.

The residential and industrial markets continue to perform well, and yields remain tight. We have also seen multiple sale and leaseback (S&L) transactions come to market as operating businesses look to raise equity. Savills recently reported that the second half 2021 is expected to see a record number of S&L transactions across Europe, fuelled mainly by logistics occupiers taking advantage of low yields. These transactions can be attractive to lenders looking for long-term stable income, however we have seen this is dependent on the tenant’s credit rating and lease length.

Spotlight: Hotel Market

The hotel sector has become an increasingly important sector in CRE lending, with debt origination to hotels growing by 141% since the GFC. The sector has also been one of the worst impacted sectors from COVID-19, with many hotels forced to shut for most of the last 12 months and even when they were allowed to open, saw a restriction in foreign travel and overnight stays.

Hotels, as with other sectors, were the beneficiaries of government and regulator pressure on lenders to apply leniency over the course of the pandemic and various lockdown periods. However, we are now seeing lenders re-evaluate and apply more pressure on borrowers. This has left many hotels, currently seeing little or no cashflow, in what has been coined as situational distress. Otherwise stable businesses with coherent business plans may face difficulty in refinancing any maturing loans.

We have seen debt funds and challenger banks step in to offer a lifeline to borrowers that are no longer able to secure finance with mainstream lenders. These funds are often able to offer more flexible terms and take a more speculative view on the situation. By way of example, Westfort have recently secured terms from debt funds and challenger banks for refinance and capex facilities to support the refurbishment and re-branding of a hotel, following the latest Travelodge CVA.

A report by Cass Business School found that average senior lending margins on a hotel of good credit quality, at an average LTV of 58%, rose from 270bps to 305bps in the first 6 months of last year, and was closer to 400bps by the end of the year.

Lenders are also looking for more protection when they do make loans, with targets on Interest Coverage Ratios (ICR) rising from 1.8x to 2.2x, with some lenders requiring 4x for managed hotels that do not benefit from strong brand association. In fact, 78% of lenders preferred financing hotels with a franchise or renowned brand, hence some independent hotels have been forced to join a renowned brand in order to refinance.

Headline Transactions / News

MGT’s £150m Battersea BTR Purchase

Pan-European investment and asset management firm MGT investment have purchased the remaining 92 flats in Battersea Power Station’s electric Boulevard. This highlights investor confidence London’s long-term fundamentals as a prime market.

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£1bn of live business park deals in the UK

With three significant deals currently progressing, the business park sector remains strong in the UK due to attractive yields. Deals include Singaporean listed Frasers Property’s £180m acquisition in the Midlands.

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Report on Hotel lending market

A report by The Business School (formerly Cass) and Berkeley Capital Group on lending in the UK hotel sector in 2020 showed margins increased from 2.7% to 3.05% for an average loan of 58% LTV in the first 6 months of the year. It is expected average for the end of the year would be 3-5% for a hotel with good credit quality. As lenders consider the increased risk, they have been lending at lower LTV ratios, and requiring much higher interest coverage ratios. It also highlights what we have seen with banks lenders retreating from the market and debt funds likely to be the main source of new originations in 2021.

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Westfort Advisors | Real Estate Debt Market Solutions

Debt Advisory

Arranging, structuring and executing optimal debt finance solutions for CRE investors.

Debt Asset Management

Detailed credit risk analysis, enabling clients to really understand performance.

Restructuring & Workout

Distressed debt management plus complex restructuring and workout capabilities.

Real Estate Advisory & Underwriting

Valuation, inspection, underwriting and due diligence support for performing and NPL transactions.

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Future of PRS

Chaired by Professor Andrew Baum (’Future of Real Estate Initiative’, Said Business School); Westfort Advisors and Beaumont Bailey hosted senior leaders from across the PRS sector, including Sir Stuart Lipton (Lipton Rogers), Richard Jackson (Apache Capital) and Rachel Miller (Grosvenor), for a candid discussion on ‘The Future of PRS’.

The discussion featured personal insights with respect to key challenges facing the sector and thoughts as to how best to meet the demand for quality rental accommodation across the various submarkets. Currently, despite investment into the UK’s PRS reaching a record total of £3.1bn in 2018, (up 33% from 2017), the sector is still substantially lagging in institutional investment compared to the US and Europe.

Resilience of PRS

Covid-19 continues to have a significant impact on the real estate industry and particularly retail and office sectors. Cushman and Wakefield reported leasing volumes were 20% below average for office space in London at the end of Q1 2020. Similarly, ‘Re-leased’ reported that across their portfolio of 65,000 retail assets in the UK, 48.0% of rent due had been received 10 days after the March quarter date, which contrasts to an average of 74.9% collection from the last two years.  Across UK commercial property as a whole, 67% of rent had been paid 60 days after the deadline. This compared with a figure of 84% for the December 2019 quarter.

Conversely, owners of PRS schemes around the table, acknowledged a continued demand across their portfolios, with take-up only marginally down (year on year) and rent collection above 95%. Recent changes in living and working regimes, coupled with reductions in higher LTV lending may be factors. In the longer term, forthcoming restrictions to the ‘Help-to-Buy’ scheme and the impact of a recession on affordability may see a decline in mortgaged owner occupation and an increase in demand on PRS.

However, it is important to caveat that the true resilience of the sector will be tested over the next few quarters.

Fundamentally, the lack of housing supply and issues surrounding affordability are a regional issue; not a national one. In London, housing prices have risen the most across the UK, by almost 59% since the 2007 to 2008 peak. Furthermore, the ratio of median house prices to median earnings in London, has risen from c. 5.5x in 2002 to 13.09x in 2018, automatically pushing those dreaming of home ownership within London into the rental sector, which has responded by offering a spectrum of product offerings across attractive locations, with on-site amenities and the promise of community.

Impact of COVID-19 on Consumer Behavior

The consensus around the table was that employees want flexibility (as they always have); however recent events have shown that, for many, working from home has not impacted on productivity and flexible working is likely to increase. Landlords across the table therefore acknowledged that a key question for PRS landlords is how they position their assets to cater for the well-being of their tenants, their appetite for on-site leisure and community, the general convenience for working from home and the optionality to walk to work.

Increasing on-line interaction and WFH will arguably contribute to the growing societal issue of loneliness. People are generally social creatures and will ultimately seek physical, social interactions and the spirit of community. PRS schemes can be designed to help foster a sense of community and this is where participants saw the sector playing an important role.

If COVID-19 truly has catalysed significant shifts in work practices, other communal offerings will arise in its place. Many of the participants agreed that now is the time for accelerated growth within PRS schemes to meet a new type of social need.

Impact of COVID-19 on Institutional Investors’  

Following the European precedent, there is great potential for the PRS market to grow in the UK. Switzerland, for example, accounts for a PRS ratio of over 50% and Germany over 40% of total dwellings, much higher figures than England’s 17%. Some of the reasons our roundtable put forward for this lack of institutional interest has been around the inability to scale due to political focus on homeownership, tax regulations, finite availability of suitable land plots, a disjointed planning policy and complex planning process. However, PRS resilience throughout the lockdown period (if that turns out to be the case) is likely to spur further interest from institutional investors, as they pivot away from office and retail sectors.

Bottlenecks to Growth


Westfort Advisors provided an insight on the state of the real estate finance market for PRS and where potential bottlenecks may arise.  Essentially, there is still significant illiquidity in the debt markets; banks and institutional funds are only just beginning to look at completely new originations, albeit very selectively. However, in the short term (and certainly beyond), there will be availability of senior financing for the right opportunities and the right Sponsors, given the strong markets fundamentals.

Large/scalable schemes, managed by top tier Sponsors certainly remain attractive to insurance backed lenders, German Pfandbriefbank and clearing banks, who can offer senior financing at c.55%-60% LTV.

However, given that prime yields broadly range from 3% for Prime Central London to 4.5% for Prime Regional Cities, higher leverage debt or debt from higher risk/return lenders (debt funds) is often unviable. Many debt funds are also unable or unwilling to consider the relative complexity and risk of financing the development of smaller schemes, which will prohibit smaller scale developers.

Given the prevailing uncertainty in the market and the construction and operating risks associated with developing PRS, lenders are becoming increasingly selective with respect to the caliber and track record of the Sponsor, in addition to the viability of the proposed scheme.

Long term

Further bottlenecks mentioned by our guests centre around the availability of land, and in turn the feasibility of PRS schemes. Due to regulations and the barriers to entry created by complex planning rules, the risk of locking in capital over prolonged periods has impacted upon the feasibility of affordable PRS schemes. Current processes, lead times and long-return windows create a competitive edge for BTS developers who can take money off the table quickly, as well as larger players who have the resource to wait out long lead times.

Vertical Integration

There is also a case that misalignment between developers and operators can negatively impact the type of product that the PRS world is trying to achieve. For developers, the aim is to recycle capital as soon as possible and move onto the next scheme, ultimately creating an environment where there is less focus on the long-term durability of the schemes, or how the building caters to promote community and amenities. This is of critical importance to operators aiming to reduce tenant turnover, maximise the tenant experience and, in turn, to justify higher rents.

One solution to overcome this, as suggested by the table, would be to look at vertical integration from cradle to grave. Whilst the vertical model allows full capitalization on the spectrum of monetizable activities within the PRS world, it is incredibly difficult to execute with many players lacking the necessary skill-set to execute each piece across development, brand, lettings and management with ease. Beaumont Bailey suggested that this is where talent acquisition is key. In order to spot those with the relevant skill sets within hospitality, to move across to the property sector with the revitalized skill set more geared towards to the BTR offering. In addition, the end-to-end product and investment required is not feasible without scale, given the fixed cost associated with each piece of the puzzle.

Broader Socio-Political Elements

It was highlighted within our discussions, that we need to perhaps re-evaluate who the target consumer is for BTR schemes. Those planning future projects need to be clear on which segment of the population this would best serve. Given the social constructs and schema within our society, it is highly unlikely that an individual would choose renting over ownership long-term, if they have the capabilities to purchase a home. As a collective, we view homeownership as the pinnacle to work towards and a marker of affluence. As highlighted by one of our guests, our government places great encouragement of home ownership, and therefore introduces schemes to help facilitate this. Nations with higher percentage PRS, have an alternative culture to this, however this is due to the state of their rental market, being different to that we experience in the UK. Many European countries receive greater protections for tenants and less impetus on the marvels of home ownership. If new PRS schemes can evolve, to provide all they are promising, in regard to amenities and top property management and hospitality; and the government introduces legislation more geared towards protecting tenants, rather than landlords, we too may see a shift in culture.  In addition, the cost of living in owned property is cheaper than renting in most locations. It’s often a practical economic decision for those who have the choice. By making land and planning more accessible, the cost of renting can decrease, reducing the economic arbitrage between the two options.


In summary, the sector will adjust to the challenges posed by COVID-19 and the change in our behavioral patterns. As one might suspect, the need for beds and homes, even during the crisis, has not gone away and to date, PRS has shown to be resilient vs other sectors. Investors will continue to offer a wide suite of amenities in their schemes to meet demand, and they remain buoyant for the sector. This could be a pivotal moment in the PRS sector which is well positioned to capitalise on the availability of debt and equity which is seeking a home away from other sectors (such as retail and hospitality) that face much more challenging times ahead.

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