Lenders circumspect as tariffs policy impact remains unclear

David Renshaw, Managing Director and Co-Head of European Real Estate Debt recently spoke to Real Estate Capital Europe about the effect of the Trump trade tariff policies and how lenders within the European real estate debt market are switching to a more defensive stance. At Fiera, we remain focused on senior secured lending against assets in under-supplied sectors, such as the UK and Spanish residential sector,  which we believe offers a more conservative, risk-adjusted approach.

Tariffs plan adds a new set of risks few had factored into business plans.

US President Donald Trump’s trade tariffs policies have made the health of the macro-economic backdrop difficult to diagnose, and introduced a new set of risks few real estate lenders had factored into 2025 business plans.

Market participants reported a competitive lending environment in the first three months of the year. However, lenders switched to defensive mode after the tariffs announcement. As the impact of the policy becomes clearer in the coming weeks, lenders face the prospect of originating amid higher risk.

Data from Bayes Business School, focused on the UK market, shows acquisition financing activity had picked up last year, bolstered by two Bank of England base rate cuts. Figures released in May showed acquisition financing accounted for 31 percent of origination in 2024 compared with 28 percent during the previous year.

But market participants tell Real Estate Capital Europe the investment financing market could lose momentum. Lenders also say they are focused on a smaller range of opportunities, development financing or projects with value-add potential and in sectors with undersupply issues because they see these deals as insulated from volatility.

As Peter Cosmetatos, chief executive of property finance industry body CREFC Europe, said in his response to Bayes’ report: “[Last year] feels like a very long time ago, and geopolitical and geoeconomic factors… are complicating any assessment of real estate fundamentals or the flow and cost of capital into our market.”

Cosmetatos’s observations reflect inertia among lenders as financial markets initially digested sweeping proposed border taxes on all US trading partners. In the weeks that followed the announcements, lenders shrunk from negotiations to fathom all possible risks and stopped returning calls about live deals, according to several debt advisers speaking anonymously to REC Europe.

As Timothy Alexander, managing partner, head of global capital solutions, at London-based debt adviser Jackson Square Partners, says of market sentiment during April: “All bets were off. Everything stopped as lenders took a step back to understand what they were lending into.”

Lenders buckled down to assess not just the assets they were about to issue loans against but also the buildings’ occupiers, for fear they would be tainted by the economic fallout, Alexander explains. “Lenders were saying, ‘I am looking at risks I have never had to underwrite before’ and wondering if there was anything they could be doing about those risks. No one initially understood what it meant.”

Pricing changes

As REC Europe reported in April, tariff policies tested the strength of back leverage lending as US investment banks, a critical source of this capital for debt funds, held off issuing term sheets.

Non-bank lenders in the Nordics felt the effects, says Stockholm-based Viggo Bekker Ståhl, head of structured finance and debt advisory at property consultant Colliers. In April, he said alternative lenders he had been advising had been unable to progress with deals. Banks, he said, were requesting additional margin on those underlying loans, and one deal could not complete due to these changes.

Disruption to back leverage relationships was also observed by Martin Farinola, head of real estate debt strategies at London-headquartered manager Delancey. “We have seen our competitors in the debt market step away from deals, and typically this is because they use back leverage. The volatility meant the banks behind deals could not price the loan nor offer certainty of execution,” he says.

The European commercial mortgage-backed securities market, which had also been reviving, is predicted by some to experience setbacks. Capital markets pricing has been volatile since ‘Liberation Day’, illustrated in movements in 10-year government bonds.

In April, rating agency Scope Ratings said the “bumper start” to CMBS issuance in 2025 – with first quarter issuance of €3.4 billion outpacing the

€2.3 billion of issuance for all of 2024 – was unlikely to be sustained. Paris- based Benjamin Bouchet, senior director at the firm, said in April: “Investors do not want to come to market in such volatile and uncertain markets. If you can wait, you wait.”

Nerves have eased

Since that initial industry reaction to Liberation Day, Alexander says nerves have eased because real estate lenders are taking confidence from the fact they lend against real assets, as opposed to companies, which could struggle under tariff increases. He adds: “Lenders feel that if they are focused on specific markets and on undersupplied assets, such as residential, they are not at so much risk.”

David Renshaw, managing director and co-head, European real estate debt, at London-based manager Fiera Real Estate, which currently deploys loans in the UK and Spain, also feels that lending to borrowers developing in under-supplied real estate sectors represents a more conservative approach, as opposed to private credit loans, for instance.

“We are not lending to a corporate that is running multiple business units, some of which could be badly impacted by tariffs. Rather, we are issuing senior loans secured against real estate developments,” he says.

But he does add: “The market is in a phase where it is very difficult to work out precisely what the impact of tariffs will be as things change almost daily.”

Stephen Morita, senior director, debt advisory at real estate consultant JLL, is also circumspect: “Managers have raised capital to deploy into the credit space, but they do not need to deploy it in the next 12 months. While the market may bounce back, if there is another shock to the system and managers can’t find attractive opportunities for the risk, we could see a slowdown as compared to the past six to 12 months.”

Dale Lattanzio, managing partner at London-based manager DRC Savills Investment Management, is homing in on borrowers with value-add business plans. “We are interested when there is enough value-add in a project that sponsors will be pressing ahead. The activity we are focused on financing, and where we have seen requests for debt, involves deals where there is ground-up construction or capital expenditure work, and this is across residential, student housing and industrial. [We are] also looking to lend against prime London redevelopments and refurbishment projects.”

Lattanzio says this is due to a structural lack of best-in-class office product, meaning the sector is less likely to be impacted by macroeconomic volatility.

He warns a further reduction in base rates is not guaranteed if trade tariffs prove inflationary, echoing the mood of central bankers. In his weekly capital markets review, posted on 17 May, Oliver Salmon, global capital markets researcher at real estate consultant Savills, argued central banks themselves remain in ‘wait and see’ mode and have been warning of downside risks to the global economy since 2 April.

As the ECB said in a statement after announcing its interest rate cut on 17 April, the growth outlook had deteriorated owing to rising trade tensions and it flagged “increased uncertainty”.

Even if central banks continue with cuts, overall credit spreads are unlikely to change, says Farinola, because lenders will seek to ensure overall debt costs reflect higher risk and will therefore increase margins to reflect that.

Margins had been reducing owing to intense competition in popular asset classes. In residential and logistics, for instance, they had dipped below 2 percent during the fourth quarter of 2024 across Europe, according to data from risk management firm Chatham Financial.

Lattanzio also agrees that debt costs are unlikely to change: “For private lenders, in light of base rates going down, I don’t think we will see spread compression, because there is more risk.”