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uropean commercial real estate issuers continue to face significant challenges in securing financing. Despite debt markets slowly reopening, investor confidence has not fully recovered due to high leverage and governance concerns. Only companies with a strong BBB credit rating or higher have access to liquid debt capital markets.

    Falling bond yields and tightening spreads may provide financing options competitive with secured bank loans. However, for issuers at the investment grade threshold, fear of downgrade translates into wider spreads, exceeding 200 basis points. This contrasts with the 60-145 basis point range in 2021.

    Investor nervousness also points to further declines in property values at the riskiest end of the market. Banks' appetite for financing less attractive properties remains limited, exposing real estate managers to a negative feedback loop. The sale of distressed assets could test market resilience and lead to balance sheet restructuring.

    Non-investment grade issuers face even tougher financing challenges, with spreads wider than investment-grade issuers. Debt capital markets do not offer them a viable financing source, making it difficult to avoid covenant breaches and support interest coverage ratios.

    The risk of further declines in property valuations looms over the sector. Corrections in prime real estate assets are nearing the bottom, but prices of non-prime assets continue to decline. Open-end real estate funds experiencing cash outflows could exert additional downward pressure on valuations if they begin to divest less attractive properties.

    A more abrupt shift in interest rates could provide greater relief for European real estate companies. A continued cautious reduction in interest rates is expected, but quicker rate cuts could provide a funding opportunity for companies with solid portfolios and low leverage.

    Banks have become more cautious and selective, but are still lending to the sector. They are willing to renew existing financing for properties or real estate portfolios with solid operational performance, but loan margins have increased significantly. Bank financing may be a more reasonable alternative for weaker creditors than capital markets-based financing, but has its limits.