The fading prospect of lower interest rates is challenging property owners and borrowers, but the same market reset is creating “a genuinely compelling opportunity for disciplined lenders,” said Cyrus Korat, managing partner at DRC Savills Investment Management (DRC Savills IM).
At the start of 2026, investors expected interest rates in the UK and Europe to ease, providing another lift to a tentative recovery in real estate markets.
Those expectations have since diminished. The US-Iran war and the continuing conflict in Ukraine have pushed energy prices higher and revived inflation concerns, clouding the path toward lower borrowing costs.
Short-term rates have moved relatively little. The Bank of England has held its benchmark rate steady this year, while the European Central Bank raised its key rates by 25 basis points in June.
The bigger shift has come further out on the yield curve. Medium- and long-term rates have risen by roughly 50 basis points, according to DRC Savills IM, putting them at or above the upper end of their ranges in recent years.
Markets are again confronting the prospect that interest rates could stay higher for longer.
For property owners, that means elevated financing costs, pressure on valuations and a slower recovery in transaction activity.
For real estate debt investors deploying fresh capital, however, the same conditions can offer higher returns and structural protection against further declines in asset values, according to DRC Savills IM.
Periods of repricing and dislocation have historically produced attractive entry points for experienced real estate lenders.
In the following Q&A, Korat explains why higher rates, repriced assets and a looming refinancing wall are creating opportunities for private real estate debt investors.
Q: How is the higher-rate environment affecting real estate markets?
A: Much of the expectation around rates holding steady or even decreasing in 2026 has vanished, and property owners have had to operate with higher debt costs than they were likely anticipating.
With expectations for lower rates at the start of the year, existing owners were encouraged to hold on to assets longer, while, at the same time, new capital was encouraged to invest with the tailwind of lower rates supporting the investment case. Yields were expected to harden and the bid-offer spread to narrow through the year, helping support investment activity.
But today, owners are facing the double whammy of continued higher debt costs and yields that are flat or, in some cases, even slightly wider as the recovery in values stalls.
In general, this has led to lower transaction volumes as underwriting assumptions between buyers and sellers have moved further apart and debt affordability has worsened.
Q: What are the biggest challenges for real estate investors in this environment?
A: Valuations are under a little pressure. It is probably fair to say that the larger concern for real estate investors is any rise in long-end rates, rather than what central banks will do with short-term rates.
Long-end rates, such as the 10-year gilt yield (UK government bond yield) and longer-dated swap rates, have much bigger structural implications for where valuations ultimately settle because of the long-term nature of real estate investment.
So with the long end rising over the past year, required property yields have been pulled up with it, weighing on valuations.
A further pressure is legacy debt. Loans underwritten at the historically low coupons of the pandemic era now face refinancing at meaningfully higher rates, leading to increased debt service costs, compressed coverage ratios and, in some cases, forcing borrowers to inject additional equity or seek alternative financing solutions.
This refinancing wall represents one of the most significant structural dynamics in the market today.
These conditions undoubtedly present challenges to equity investors and overleveraged borrowers.
However, for disciplined real estate debt lenders, they represent precisely the kind of environment where the asset class thrives, offering both attractive returns and structural protection at a time when both are hard to find elsewhere.
Q: What can private real estate debt offer investors in the current environment?
A: In this environment, investors are attracted to the combination of resilient risk-adjusted returns and the structural protection that lending provides.
On the return side, the coupon on offer has simply moved up. As discussed earlier, reference rates and longer-dated swaps have risen over the past couple of years, and that feeds directly into the coupon on real estate loans. Lenders are earning substantially more today than on equivalent loans written a few years ago.
On the protection side, a senior lender sits above the equity in the capital structure, meaning any decline in asset value is absorbed by the borrower’s equity before it affects the loan.
On top of this, the repricing that we have seen in the property sector has created conditions in which new loans are underwritten against rebased asset values, strengthening downside protection.
We have also seen loan-to-value (LTV) ratios decline, creating a larger equity cushion that further shelters the lender’s position in the event of additional valuation reductions.
Q: How should investors approach the private real estate debt market?
A: We believe investors should be targeting a broad whole-loan program, diversified by sector and geography. This approach can provide the flexibility to allocate capital tactically where risk-adjusted returns are most attractive, with capital never structurally committed to a single geography or asset type.
This flexibility means that investors can target structurally supported sectors such as living and logistics, where occupier demand is underpinned by long-term drivers such as demographics, a housing undersupply and the reconfiguration of supply chains.
Equally, it might mean selectively financing tactical or dislocated opportunities, for example offices, where borrowers are implementing sustainability-focused asset upgrade strategies, or assets caught in the refinancing wall.
The two are not mutually exclusive: a diversified program can balance defensive, income-led lending with higher-returning special situations and adjust that mix as pricing and risk evolve.
My final point here is that 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.)