As we entered 2026 much of the market expected a general easing of interest rates across the UK and Europe, helping to further add to the nascent recovery in real estate markets. However, events beyond the real estate world have conspired to cloud the pathway for interest rates, resulting in a more nuanced view of the recovery, and putting on pause any expected benefit from lower rates in the immediate future.

Inflation concerns have re-emerged, in large part due to the increase in energy prices driven by the conflict in the Middle East, and enforced by the ongoing war in Ukraine. But while short term rates have yet to move meaningfully (The BOE has held rates level in 2026 while the ECB has raised by 25bp), medium and longer term rates have experienced a fairly substantial shift – upwards of circa 50bp putting them at the top of or beyond the high end of the range experienced over the last few years.

The market is now anticipating an environment of sustained higher rates once again.

For experienced real estate debt investors, periods of dislocation and repricing have historically been among the most attractive entry points. Cyrus Korat, Managing Partner at DRC Savills IM, shares his views on where the market stands today, and why he believes the current environment presents a genuinely compelling opportunity for disciplined lenders.

1) How has the real estate sector been affected by this changing rate environment?

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 the expectation of lower rates to come at the start of the year, existing owners were encouraged to hold on to assets longer, whilst at the same time new capital was being encouraged to invest with the tailwind of lower rates helping to support the investment case.  The expectation of hardening yields and closing bid offer spread was expected to materialise through the course of the year helping to 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 buyer and seller have moved further apart, and debt affordability has worsened.

2) What challenges has this environment created for real estate investors?

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 the immediate concerns about what central banks will do with short-term rates.

Long-end rates (such as the 10-year gilt 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 over leveraged 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.

3) You say there are opportunities – what can private real estate debt offer investors in this market? 

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.

While on the protection side, as a senior lender you sit above the equity in the capital structure, so any fall in value is absorbed by the borrower’s equity before it reaches the loan. On top of this, the repricing that we have seen in the property sector has created conditions whereby new loans are underwritten against rebased asset values, strengthening downside protection. We have also seen Loan-to-Value (LTV) levels reduce, adding a larger equity cushion which further shelters the lender’s position in the event of further valuation reductions.

4) How can investors best navigate this market?

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, undersupply of housing, and the reconfiguration of supply chains.

But equally, it might mean selectively financing tactical or dislocated opportunities – for example the office sector where borrowers are implementing sustainability-focused asset upgrade strategies or assets caught in the refinancing wall.

The two are not mutually exclusive; a diversified programme can balance defensive, income-led lending with higher-returning special situations, and adjusting 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 characterised by high returns for debt secured on 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, all of which provides a range of compelling opportunities for non-bank lenders.