When loans start to reach expiry in the real estate market, the question of refinancing quickly moves to the top of minds. However, refinancing is no longer just about valuations, and now must factor in technical reports and ESG risks which are altering valuations. When deciding whether to offer refinancing, lenders will need a building survey that covers all the technical advice required to make unbiased, and low-risk, decisions.

Looking at the market 

Following the crash of 2008, investment in the European commercial property market has gradually been back on an incline with a boom seen over the past few years. However, from soaring energy prices to rising interest rates the recent strain put onto our economy has produced a volatile real estate market for all to navigate. And the turbulence seen over the past 12 months hasn’t left any stone unturned, from investors now seeking to off-load assets to developers having to halt new projects.

It would also appear to be the start of a new era for European commercial real estate, the era of the refinancing gap. According to AEW Europe SA, the gap, or the shortfall in the debt due for repayment and the money available to repay it, for the UK, France and Germany is €51 billion. A gap caused by the decline in building values, borrowers will need to fill this refinancing gap without the assistance of low interest rates due to central banks seeking to battle rising inflation.

Defining the refinancing gap

Considering the current market, lenders are beginning to reduce the amount they are willing to loan as borrowers seek to refinance loans. This is where the role of alternative financing comes into play. A once unpopular option, mezzanine finance will seek to fill the refinancing gap.

Whether or not existing senior and mezzanine lenders will offer new refinancing terms does fall to more than solely a valuation. Today’s refinancing world is very much about the asset itself, and in particular the condition; compliance with regulations including potential changes to MEES in 2027 and 2030 (during the term of a loan), ESG requirements of the lender, building safety act compliance (for residential assets over 18 metres) and much more is essential.

ESG has leaped to the top of the requirements lists for lenders but with new regulations, and changes to existing legislation, there are more considerations for all. The minimum energy efficiency standard (MEES) for example is expected to mandate that by April 2027 all non-domestic buildings must have an EPC rating of C or higher, rising to a B rating by 2030. A building that is non-compliant is unlettable, without potentially expensive improvement, making it a risk for lenders. It is in the best interest for all borrowers, but especially those whose 5-year loans are soon to expire, to undertake the necessary energy and further ESG improvements to meet refinancing terms. And we have already seen for lenders, that meeting ESG requirements is essential before any capital is offered.

An expert in his field, Martijn Nijland, from the debt and structured finance team at Cushman & Wakefield in the Netherlands, spoke to us summarising “The momentum in ESG real estate financing is building; no longer is it a nice-to-have, it’s now a want-to-have and, increasingly, a must-have. ESG milestones are no longer agreed on a tell-me basis but on show-me, and that will soon be on an evidence-it basis, increasing the need for external verification and confirmation.”

In comes the lender and refinancing survey 

With any investment comes a level of risk, mitigated by good due diligence. Impartial advice in the form of technical due diligence reports is imperative to identify any risks and allow for good decisions to be made when lending on an asset.

Whether a large-scale institution, private financer, or mezzanine lender, we can provide the due diligence you need to understand whether to offer refinancing terms. But with recent changes to valuation requirements, it isn’t just a building survey you need to undertake to mitigate risk, it is ESG reporting too; this is where a lender and refinancing survey comes in.  Our lender and refinancing survey incorporates the current questions asked by valuers when it comes to major topics in the industry, including energy use intensity, third party certifications and social impacts.

Offering multi-service advice, our ESG and TDD teams work together to produce this lender-targeted report which mitigates the risk in refinance. The survey includes in-house input from the following disciplines:

• ESG – outline the regulations and standards you need to target including MEES targets, the building’s base line energy usage and subsequent reporting using CRREM reporting
• Technical due diligence – provide a building surveyor, experienced in technical due diligence matters
• Mechanical and electrical – engineers will inspect and work to identify required CAPEX
• Health and Safety – advice on compliance with the Building Safety Act 2022, which came into force on 23 January 2023, and Fire Safety (England) Regulations 2022 applying to all buildings which contain two or more residential units

Whilst there are questions surrounding the refinancing gap, many in the real estate financing sector are more confident in its debt infrastructure now than that of 2008. Alternative lenders are now more widely accepted, and the use of debt financing is a viable option to secure capital. Martijn explains “Compared to the 2008 financial crisis, liquidity is not just more amply available, it is also far more diverse with a large array of alternative lenders now active in the market.”

Whatever the debt structure and whatever the market we find ourselves in, we are here to help and guide you through this process. To hear more about our lender and refinancing survey, please get in touch with Head of technical due diligence in London, Michael Smyth, Head of development and funding, Steve Hughes and Head of ESG consulting, Katherine Beisler.