Refinancing – Mind the gap

  • 20th February 2024

Morgan Allen and Steven Oliver, partners at Gerald Eve, provides an overview of the education debt market, revealing an increase in payment defaults and why it is now costing schools and nurseries more to borrow less

Bursars and finance directors with a refinance due within the next couple of years should start looking at options as soon as possible.

Between 2019-2022 it is estimated that c€640bn of real estate debt was originated.

And research suggests that based on current interest rates and capital values, approximately €176bn will not be re-financeable.

This refinance gap may reduce if interest rates begin to fall and we see a recovery in capital values. However, it is likely that a substantial refinancing gap would still remain.

The rise of defaults

Several properties owned by asset managers have already defaulted on their payments over the last year, including Blackstone, Brookfield, Pimco, and RXR.

Blackstone defaulted on a $531m bond backed by a portfolio of offices leased by Finnish company, Sponda Oy, in March 2023, while Pimco-owned office landlord, Columbia Property Trust, defaulted on $1.7bn of mortgage notes.

With over €100bn of commercial loans maturing in 2024 in the UK, Germany, and France, and approximately €350bn across Europe, the market is predicting stress in what could be a difficult year for refinancing higher-leveraged facilities.

The path of interest rates

In 2023, all-in borrowing costs reached a 20-year high. But there is hope that the interest rate raising cycle is at its peak, with the Bank of England holding rates over the last three monthly meetings (as at the time of writing). However, the narrative is that rates will remain higher for longer and we should not expect a rapid reduction in rates during 2024.

We have seen downward movement on UK Swap Rates with the five-year SWAP trading at 3.586% (as at 10 January 2024) which is circa 0.5% lower than this point in December 2023, and the forward SONIA curve has a downward trend falling to below 3% in July 2026 (based on current estimates).

This falling cost of debt should hopefully ease the pressure on borrower income covenants, as well as helping to underpin commercial real estate values.

We predict lenders will continue to supply new debt to the education sector, but that loan-to-value ratios (LTVs) will be lower than previously, at say 50-55%, driven by ensuring interest cover and debt yields remain strong.

Lower LTVs are likely to cause problems for those needing to refinance facilities with higher leverage over this level.

In short, due to the combination of successive interest rate hikes and lowered LTVs, it will now cost schools and nurseries more money to borrow less money.

Lenders are also paying far greater attention to interest cover ratios than ever before; and they will want to see that interest is more than amply covered by the trading activity.

We expect lenders and investors to undertake more-robust stress testing on debt and finance facilities.

Morgan Allen

Education and early years finance

Funding for the education and early years sectors was traditionally the preserve of the UK clearing banks.

The education sector has historically been highly fragmented in terms of ownership, with only a small number of larger groups.

More recently, we have seen rapid consolidation with many well-funded groups rapidly aggregating portfolios.

This has, in turn, led to a number of new lenders entering the market, attracted by the strong cash flows that can be generated and the general operational resilience (despite some bumps along the way) of the education sector which we saw during COVID.

This increased lending appetite into the education sector brings new opportunities to those seeking finance for their nursery, school, or larger portfolio of education property assets.

And we now regularly see the challenger banks and new-to-market banks offering debt terms on new transactions.

Furthermore, the growth in the specialist debt fund market has also meant non-bank lenders are keen to participate in the sector.

In addition, we have seen investment funds enter the market to build groups or portfolios of assets in both the operational sector and as landlords of freeholds granting leases.

In our view, during 2024, lenders will continue to offer finance in the education asset class as it is seen as a defensive sector with strong cash flows and good levels of market transactions, showing there is still good liquidity in the sector.

That said, there remains a nervousness around the impact of VAT on the affordability of tuition fees should Labour gain control in a General Election (which is looking increasingly likely) and seek to make good on this element of their manifesto.

We predict that the stronger-performing schools which make a healthy surplus will survive, and that the impact of VAT on school fees will hit the weaker/smaller schools the hardest.

And we expect this will further drive consolidation in the market, with more charity mergers and struggling schools being bought by the for-profit groups.

We predict prudent bursars and finance directors will have stress tested their forecast cashflows to reflect potential falls in enrolment if/when VAT is applied to tuition fees in order to plan mitigation strategies, and that lenders will want to see plans in place to ensure interest cover ratios are maintained if there is a dip in revenue.

The nursery sector is facing a different set of challenges, the biggest of which is the national labour shortage.

The new funding for childcare places which is being brought in is expected to drive enquiries and, in turn, occupancy levels.

It is not yet known, however, what the impact will be on nurseries’ trading performance.

Whereas we fully expect the office and retail sectors to face strong headwinds in 2024, our view is that the education sector, alongside the living (residential, care and student), and industrial/distribution will continue to be areas of focus for lenders.


Previously, (over 10 years ago at least) the clearing banks would typically lend on the vacant possession (also referred to as the ‘bricks and mortar’) value of education property when taking security.

More recently, lenders have measured the loan against the value (the LTV ratio) of the value of the property ‘as a fully-equipped trading entity’.

Some lenders do not have any appetite for leasehold assets at all, or perhaps only if the leaseholds form part of a larger portfolio containing more freeholds.

We predict that some lenders will pay greater regard to the market value assuming a ‘restricted sale period’ (i.e. the school is in distress and it is marketed in a shorter time frame).

This figure is generally lower than the value as a fully-equipped trading entity (i.e. no special assumptions on a marketing period).

Back in the day, this would have been called a ‘forced sale’, a term which is no longer used.

Discussing potential insolvency scenarios sounds very bleak indeed! But it is not meant to be.

Essentially, the lender will want to know that the loan can be recovered, even in the event that loan covenants are breached. In our experience. It is somewhat rare for a lender to take possession of a school, as they generally want to avoid any reputational damage which might ensue if the care and education of children is interrupted.

Key trends for 2024

If you have a refinance during 2024, ensure you engage early with your lender to understand their appetite and requirements.

And seek advice from real estate debt specialists to give you a broad market view.

When looking at new development/investment facilities it is even more vital to obtain a broad market view, as there are a range of products and solutions which may meet your needs; it is not one size fits all.

If you have concerns on meeting your loan covenants, seek advice from a real estate debt specialist and your lawyer on your options and how best to negotiate.

In our view, Loan to Value covenants will remain below trend during 2024 with 50-55% LTV being the ‘new normal’ for investment finance, but we are still seeing higher leverage for development debt.

If there’s a gap to fill in your refinance, then a partial capital raise via a ground lease sale alongside senior debt could offer a solution.


Author biog: Gerald Eve specialises in valuing education property for loan security purposes in addition to valuations for other purposes and agency

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