{“title”:”Rewriting for Clarity: Spain Real Estate Debt Trends 2024–2026″}

The Spanish real estate sector faces several demanding years ahead in terms of debt, but it plans to meet these challenges by improving performance compared with the past. Over the next three years, from 2024 to 2026, the market will require about 64.8 billion euros in new debt, according to EY’s Credit Property Telescope. In 2024 the sector will push for around 18.45 billion euros, while projections for 2025 and 2026 sit at roughly 25,500 million and 20,800 million euros respectively, reflecting a shift toward higher-quality collateral and more conservative financing structures.

The sector finds itself in a period where debt needs exceed the willingness of financiers to supply. Banks are adopting defensive positions, prioritizing transactions with stronger collateral and tighter leverage, which means some investors may not secure the debt levels they expect. At the same time, rising interest rates increase debt costs, and financiers are keen to reduce risk and leverage. When refinancing arrives, investors may need to contribute more capital to meet financing frameworks. Valuations for some asset classes have fallen, further amplifying leverage concerns. Felix Villaverde, EY Real Estate Director in Strategy and Transactions, notes this dynamic.

Overall, about 65,000 million euros are in play, including 19.8 billion from refinancing of major real estate deals closed by institutional funds between 2016 and 2020. Some owners may find it hard to complete transactions and may need to rethink their portfolios. For projects requiring extra capital to access refinancing, if an investor cannot or does not wish to provide it, the only option could be selling the asset in an environment of falling valuations, aligning with the original business plan, according to Félix Villaverde.

Debt funds, new heroes

Debt funds are expected to be the leading players in the coming years, managing around a quarter of planned finance with a cumulative volume of about 11,000 million. The big four firms observe that more debt funds are raising capital and opening offices in the country, preparing to participate in deals long dominated by traditional banks. The surge in interest rates has widened the space for debt funds, which now offer more competitive options than before in relation to financial institutions. EY notes that these instruments can provide greater leverage and more flexible debt structuring than traditional sources, with loan costs hovering in the high single digits, around 9.5%.

In real estate project finance, debt funds are gaining ground year after year, especially for well‑quality assets. Traditional banks face licensing and reputation risks and higher costs, while funds are increasingly willing to finance more complicated projects with slightly higher leverage at attractive costs. Although some funds specialize in loans to small developers, more funds are seeking financing for larger tertiary assets with deals in the 30–50 million range. One obstacle to further debt‑fund–led financing is that some transactions appear too small for these providers, according to EY’s Real Estate Director in Strategy and Transactions.

Average rates vary by project type and risk. The cheapest senior debt for rental assets and developments runs around 9.5%, with debt ratios typically between 60% and 75%, depending on asset value and project cost. Mezzanine debt, or partially convertible financing, is rising quickly, with rates near 12.5% and potential leverage up to 80% in some cases.

Banks are reducing the capital tap

In 2023, traditional banks issued roughly 1.7 billion euros in new debt loans. EY attributes this mainly to balance‑sheet protection and limited competition between institutions. The national banking landscape has consolidated, shrinking to about ten major entities from more than fifty before the crisis. Traditional banks are expected to adopt a more defensive stance, prioritizing existing customers and complying with stricter regulatory requirements rather than chasing new investors into the market.

Public credit lines and subsidies from traditional banks have waned, with roles increasingly filled by the Official Credit Institute (ICO) and new-generation funds. The latter focus on promoting a transition to a more sustainable economy, with much of their activity aimed at housing built for rent at below‑market rates, sustainable tourism, and related purposes.

Offices, retail and rental properties need the most financing

Looking across asset types, Villaverde emphasizes that each financing decision is analyzed in detail to grasp the asset’s specific conditions, which in turn shapes investor appetite. Debt structures must align all parties, and leverage levels represent a key constraint. In general, residential and hotel assets enjoy the strongest financing demand, while logistics remains viable if demand risk is controlled. Offices face significant challenges, and many financiers have paused activity there. Retail has seen underweight positions in recent years, though appetite for consolidated projects is gradually returning due to robust cash flow and debt servicing capacity.

In the near term, offices are projected to require about 10.2 billion euros of debt in the next three years, roughly 16% of the market, with around 390 transactions expected. About 38% of these deals are expected to be under 10 million euros, and 66% of activity will be concentrated in Madrid with 32% in Barcelona. Remote work trends continue to influence European financing interest, leading to a polarized appetite, with little debt available for subordinated assets, EY notes.

Retail assets, included in the Anglo‑Saxon concept of retail, are set to need about 9.6 billion euros of debt, with investor interest focused on retail parks and supermarket portfolios, while traditional shopping centers face valuation adjustments amid the current currency environment.

Logistics and e‑commerce, long a favorite, will require about 6.8 billion euros, mainly in 2024 and 2025. Financiers favor long‑term leases with solvent tenants, while developers face tighter credit access. EY anticipates that alternative financing will rise for speculative developments.

The hotel market, strong in 2023 thanks to large fund activity, will see about 7.5 billion euros of debt in the next three years, much of it for refinancing. Opportunistic and value‑add funds aiming for high returns remain the most ambitious players in this space, even as tourism continues to recover.

Another sector set for a major debt expansion is rental housing, especially affordable or below‑market units, supported by major financiers due to high demand and tight supply. This segment will require about 8.2 billion euros of debt over the coming years, with more than half of that sum needed in 2026.