First Growth on firefighting to financing in real estate debt

This article is sponsored by First Growth Real Estate & Finance

After several years focapplyd on managing loan extensions and refinancings, European real estate debt providers are increasingly returning to origination, notes Francesca Galante, co-founder of pan-European real estate debt advisory firm First Growth. While underwriting standards remain strict, appetite for financing prime assets is growing, supported by increased liquidity from banks, insurers and alternative debt funds.

Although activity is picking up, it is also becoming more polarised, with financing increasingly reserved for prime assets in core locations and backed by strong sponsors. As competition intensifies in this space, margins are compressing. At the same time, sustainability has become a defining marker of European real estate lconcludeing, with ESG performance now integral to securing financing.

What is currently shaping real estate investment and lconcludeing activity in Europe?

We have started to observe real alter since early 2025, following the decrease in base rates, macroeconomic uncertainty becoming the new normal, and the slow but visible return of liquidity.

Base rates are gradually returning to early 2022 levels. Following rate cuts by the ECB, the five-year swap rate, the real benchmark for CRE, has dropped from a peak of around 3.5 percent at the conclude of 2023 to 2.25 percent as of conclude of July 2025, remaining within a ‘tunnel’ range of 2 to 2.5 percent since conclude of Q3 2024. As rates have gone down, lconcludeers are able to view at more financings, building deals less tight in continental Europe.

Due to lower transaction volumes, we are seeing greater market polarisation in financing, particularly between prime and non-prime assets. In one of our office financing mandates, covering a trophy asset with solid rental income in the heart of Paris and backed by a prime sponsor, we received over 10 sets of indicative terms. Activity remains significantly more subdued outside of city centres and even more so for speculative financing.

We are also observing a growing allocation of value-add capital into core and core-plus transactions. Investors pursuing value-add strategies are utilising higher leverage to finance these acquisitions in order to meet tarobtain IRRs. The apply of debt advisers is becoming more and more important to create value for these investors as gearing becomes key.

Another trconclude we are closely tracking is the rise of back-leverage solutions. Many huge names are entering this market, and other lconcludeers are pursuing this as primary activity, compared with traditional lconcludeing, presumably due to favorable RWA treatment and counterpart simplicity. This is enabling credit funds to boost both lconcludeing capacity and returns, which in turn is unlocking additional liquidity.

Finally, lconcludeers are demonstrating a pragmatic and co-operative approach when dealing with more challenging existing situations where there is hope in recovery.

How are lconcludeers dealing with existing challenging financings?

Based on our recent and ongoing restructuring mandates, we have observed that lconcludeers have generally adopted a co-operative stance, often aligning with borrowers and displaying an understanding of current market challenges. In many cases, lconcludeers have refrained from enforcing their security packages or requesting that borrowers hand back the keys, even when borrowers were unable or unwilling to inject additional equity to meet loan requirements.

We encountered such situations in several mandates across Europe. These involved office assets or retail parks and were successfully resolved through covenant resets, financing extensions or amortisation waivers.
Thanks to our expertise and the constructive approach taken by lconcludeers, more aggressive outcomes were avoided. These loan agreements were achieved with limited financial concessions – such as modest waiver fees – limited margin increases and capital injections from sponsors.

However, as we progress through 2025, a shift in lconcludeer behaviour is becoming more apparent, particularly for empty office developments in peripheral locations. These assets in locations with structural vacancy, low tenant demand and limited investor appetite are facing far greater difficulties. In this context, lconcludeers are becoming noticeably more cautious and less inclined to pursue nereceivediated restructurings.

Lconcludeers are now pressing for fire sales of the assets, even at a discount, likely to recover part of their exposure becaapply necessary write-offs have occurred. This marks a departure from the more flexible approaches seen between 2020 and 2024 and highlights the widening gap in lconcludeer attitudes between core, prime locations and secondary or tertiary markets.

Looking ahead, we believe the acquisition financing market will gain momentum from Q3, if the forecasted deals materialise. This is supported by our current pipeline and a renewed appetite for strategic acquisitions, prompting more lconcludeers to lean into fresh financing opportunities.

Has the lconcludeer universe expanded post-covid? Are banks back in the game?

Banks are back, absolutely. In continental Europe, banks still account for about 60 percent of lconcludeers actively offering loan terms, but alternative lconcludeers are becoming increasingly relevant, especially for value-add deals.
In France, Italy, Spain and Germany, banks continue to dominate due to deep local relationships and historical lconcludeing footprints. Additionally, debt funds and insurers have gained substantial ground and are now key players. Their presence is also growing in continental Europe, though at a slower pace than the UK.

Some debt funds struggled with fundraising back in 2022-24 as investor capital flew into other asset classes, but a significant portion of insurance capital continues to flow into alternative debt funds, providing solid liquidity that appears to be here to stay.

We also note that many banks are increasingly embracing the originate-to-distribute model to manage exposure and meet regulatory capital requirements. Banks want to syndicate, and we often see deal structures involving a bank, an insurer and a debt fund working toobtainher.

Banks are underwriting to distribute and debt funds are coming in alongside them; they want to share the risk. All these pieces are working toobtainher in a relatively harmonised way.

Which asset classes are attracting increased debt liquidity?

Most lconcludeers have already met their loan origination tarobtains for 2025 and expect to maintain or slightly increase activity through year-conclude compared with 2024. Polarisation is expected to intensify, too – new financings will increasingly depconclude on sponsor profile and asset quality regarding location, fundamentals and ESG compliance.

We are seeing growing lconcludeer competition for prime office assets and select office developments in CBD, while secondary office stock – especially outside key urban centres – continues to struggle with liquidity.

Hotel and outdoor hospitality assets are attracting renewed interest from both traditional and alternative lconcludeers. Recent examples where we have been involved include a financing transaction in Spain involving outdoor hospitality with an institutional sponsor and the development of luxury hotel projects in prime Italian locations.

Retail assets are drawing selective lconcludeer interest, particularly dominant shopping centres with strong anchor tenants, increasing footfall and active asset management. In Italy, we have multiple retail transactions in the pipeline, which we plan to bring to market later this summer.

For logistics, lconcludeers are becoming more selective given their existing exposure – but the asset class remains attractive, especially after recent repricing has improved entest points. We have seen strong demand across several mandates, including a nearly fully occupied portfolio that drew competitive bids from both banks and debt funds.

Interest is growing steadily for student houtilizing, particularly in France, where market penetration is still low compared with the UK or Germany. After closing a PBSA mandate in Italy last year, we are now preparing a large refinancing in Germany, where recent high-level discussions with lconcludeers indicate substantial liquidity and particularly attractive pricing levels.

How have underwriting standards and financing terms evolved?

While lconcludeers have returned to origination, underwriting standards remain strict. We also see many deals that are brought through heads-up committees but do not obtain final green light. Unlike the pre-covid era, most lconcludeers now require DSCRs between 1.3x and 1.5x, sound security packages and active asset monitoring, with a close eye on asset performance.

For prime assets backed by strong sponsors, senior LTVs generally remain in the 50-55 percent range. For riskier transactions, equity requirements are significantly higher, or deals may not be financeable at all; trade-offs are being created.

Development loans are generally capped at 60-65 percent LTC when there is a strong pre-let. In the office sector, there are fewer lconcludeers willing to take speculative risk, particularly for assets situated outside the primary CBD office markets.

Amid a flight to quality, margins on senior loans have compressed by 25-50bps, contributing to a more borrower-friconcludely environment. For prime assets, pricing is approaching pre-covid levels. We are also seeing more lconcludeers willing to underwrite larger tickets – above €100 million – which was not as common in 2024.

How important is ESG in today’s financing environment?

Even though there has been some pushback in the US, ESG remains a constant underlying trconclude in Europe.

Sustainability is no longer optional in real estate financing and the integration of ESG criteria has become a fundamental requirement for securing debt. Most lconcludeers, particularly French and German ones, will not finance assets that fail to meet sustainability standards or lack a credible improvement plan.

To encourage ESG compliance, the issue for most lconcludeers is not so much margin reductions but rather whether to proceed with the deal at all. While some lconcludeers may offer more favourable terms for ESG-compliant assets, many simply apply margin premiums of around 20-30bps – or may even decline financing altoobtainher for non-compliant assets.

Are debt advisers still necessary as liquidity returns?

As market liquidity returns, a few questions arise as to whether debt advisers are still necessary. There are several compelling reasons why their role remains more valuable than ever.

Even in a more liquid environment, the financing landscape has become increasingly complex. Borrowers now face a fragmented market that includes traditional banks, insurance companies and private debt funds.

Navigating this mix effectively requires not just access to lconcludeers, but the ability to structure a financing pool or senior/junior structure that balances the interests of all parties. Without proper co-ordination, borrowers risk securing suboptimal terms across the board, aligned on worse possible denominators between pool lconcludeers.

Moreover, debt markets evolve quickly. What was considered best practice six months ago may now be outdated. Keeping pace with these shifts in terms, covenants or lconcludeer appetite is challenging for borrowers whose core focus remains on sourcing, managing and adding value to assets. It is also important to provide potential lconcludeers with information memorandums specifically tailored to address their internal credit committees’ questions upfront.

Time is another critical factor. Structuring and nereceivediating financing is resource-intensive and can distract borrowers from the core objective of extracting value from assets. Delegating this responsibility to an experienced debt adviser allows management teams to stay focapplyd on core business while ensuring the most competitive financing terms.

And finally, scale matters. Very few borrowers structure more than €2 billion in debt annually. Working with an experienced debt adviser who sees a wide range of transactions across sectors and geographies brings valuable insight, nereceivediation leverage and execution speed, all of which translate into tangible value.