DRC Savills IM: Higher Rates Boost Debt

DRC Savills IM says higher long-term rates are opening a window for private real estate debt in 2026. The firm notes that medium- and long-term rates have risen by roughly 50 basis points, putting them at or above the upper end of recent ranges. Investors can review our stats for recent rate movements.

Impact on Property Markets

Korat explains that the fading expectation of lower borrowing costs has forced property owners to face higher debt costs and limited transaction activity. The earlier belief that rates would ease in 2026 encouraged owners to hold assets longer and attracted new capital, but the current environment has stalled value recovery and widened yields in some cases. This shift has led to lower transaction volumes as underwriting assumptions between buyers and sellers have moved further apart and debt affordability has worsened.

Challenges for Investors

Valuations are under pressure, especially as long-end rates such as the 10-year gilt yield and longer-dated swap rates have risen. Loans written at pandemic-era low coupons now face refinancing at higher rates, increasing debt service costs and compressing coverage ratios. This refinancing wall is a key structural dynamic that can strain equity investors and overleveraged borrowers. The long-end rise has pulled required property yields up, weighing on valuations.

Opportunities for Lenders

Higher coupons translate into better returns for lenders, as reference rates and swap spreads have climbed. Senior lenders enjoy structural protection because any decline in asset value is absorbed by borrower equity before affecting the loan. Repricing has also lowered loan-to-value ratios, creating a larger equity cushion. Our fixtures illustrate the shift in long-end yields.

Strategic Approach

Korat recommends a broad whole-loan program diversified by sector and geography, allowing tactical allocation to sectors with long-term demand drivers such as living and logistics. The strategy can also include tactical or dislocated opportunities like offices undergoing sustainability upgrades or assets caught in the refinancing wall. A diversified program balances defensive, income-led lending with higher-returning special situations, adjusting the mix as pricing and risk evolve. Check the squad for details on loan portfolio.

The opportunity in private real estate debt today is both structural and cyclical. The current cyclical opportunity is characterized by high returns for debt secured by property assets that have repriced substantially, meaning credit vintage performance for lending today is anticipated to be very strong. Structurally, this opportunity is well supported, as the banking sector’s ongoing retreat under tightening regulation is not temporary. It represents a fundamental and enduring shift in real estate financing. Combined with a significant refinancing wall in the coming years, this has created sustained and durable demand for non-bank capital, providing a range of compelling opportunities for non-bank lenders.

This article is adapted from a written interview conducted by Savills Investment Management with Cyrus Korat, managing partner at DRC Savills IM.