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22. November 2010     Print Print 

European real estate debt market loosening up

CB Richard Ellis’ (CBRE) highlights in the Q3 2010 European Capital Markets report that the European real estate debt market is loosening up as more financing options become available and new lenders are entering the market.

Over the last quarter, a number of alternative lenders, most notably insurance companies and institutions, have entered the European debt market. This reflects the changing dynamics of the sector as alternative lenders seek to improve returns through commercial real estate lending. This growing interest brings Europe more in-line with the USA, where institutions have long been active and account for nearly 20 per cent of commercial real estate lending. However, CBRE’s Debt Advisory team believes there is still a way to go until institutional lenders’ presence in the European market becomes as significant as in the USA. They identify several barriers to entry, such as: lack of document standardization, limited transparency, and limited early repayment penalties.

Commenting on the current sentiment in the European real estate lending market, Natale Giostra, Head of UK & EMEA Debt Advisory at CBRE Real Estate Finance, said, that “it is encouraging to see that there are an increasing number of options available for financing real estate transactions. However, we expect a tightening of traditional lending channels next year due to concerns about the volume of loans maturing shortly. Versus where we were a year ago, we are also now seeing new alternative lenders both at senior and junior loan level. While loans that would meet stringent Pfandbrief criteria will keep receiving the interest of the broader market, the next tier of the market will now benefit from the attention of these newcomers. The above changes, coupled with evidence of new market entrants, suggest we are seeing a new order being established in the European commercial real estate lending market.”

Mixed Signals in the Lending Market
Aside from new players entering the market, the third quarter saw some mixed signals in the lending market. While key lending terms were stable across most of Europe in Q3, lenders’ appetite for larger loans and higher LTVs started to grow in those markets where economic and occupier market fundamentals are stronger – Germany and France. Increased competition between banks, particularly over prime deals, has played a pivotal role in the move towards more aggressive lending terms and more noticeable attempts to open up the syndication market. However, there is an increasing divide between these markets and those with higher budget deficits and weaker economic outlooks, such as Spain. Following the downgrade of Spanish sovereign debt, most banks have less capacity to lend, and their cost of money is higher. Subsequently, the key lending terms in Spain have become stricter, with the maximum loan size falling and higher margins being demanded.

Key Lending Terms*: Top Quality Real Estate and Tenant, September 2010
Market Max Loan Size Max LTV Margin**
France€100m70%150 bps
Germany €150m75%110 bps
Italy€50m65%200 bps
Netherlands €70m70%150 bps
Spain€35m65%275 bps
UK £75m70%175 bps
European Market TrendMixedFlatMixed

* New 5-year loan based on the maximum underwriting ability of a single lender
** Margin over euribor / libor swap