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16. Oktober 2012     Print Print 

Quarter of European senior real estate loans or €33b seen sourced from institutional investors and specialised funds

A quarter of all European senior commercial real estate mortgage loans, or an estimated €33 billion per annum could be sourced from insurers, pension funds and specialist loan funds within five years, pan-European real estate investment manager AEW Europe estimates. Mahdi Mokrane, Head of Research & Strategy for AEW Europe said: “There is a deep structural change occurring in the European commercial real estate lending market, with insurers and specialised loan funds rushing to fill the gap left by receding bank mortgage lending in the sector. Based on the experience in the U.S., which saw institutions stepping into the market on a large scale in the 1990s, I wouldn’t be surprised to see around 25% of all senior loans coming from these sources in the next five years.”

Mokrane conservatively estimated that there are now per year approximately €100 billion of senior loans of high-end quality commercial real estate assets originated in Europe secured by good tenant covenants, way below the €250 billion seen at the peak of the investment market in 2007. Assuming tepid European economic growth and a correspondingly slow expansion in commercial real estate investment, senior lending may rise to about €130 billion by 2017, of which insurers, pension funds, and others could readily absorb 25% or €33 billion.

Institutional investors are being attracted by the 4.0% plus net yield achievable on senior real estate loans that are backed by prime core assets with high credit-worthy tenants, which is comparable to very senior corporate bonds yielding 2.4% and 0.8% for a blend of UK, French, German five-year government bonds (i.e. core Europe sovereign debt). To achieve roughly the same yields as senior real estate loans, investors would need to target European small company lending at a much higher level of risk.

Mokrane added that this fast-growing trend in European real estate financing would also feed into the underlying property investment market, where institutional investors are focused on core income producing assets and are still mostly unwilling to move up the risk curve against the background of ongoing major political and economic uncertainties in the eurozone that look likely to continue at least until September 2013 and general elections in Germany – the decisive player in the current crisis. But with the availability of high quality core real estate in the main markets like London, Paris and Munich becoming constrained by a lack of development -- which should underpin rental levels and widen even further the yield spread with secondary assets -- peripheral core areas, including the Thames Valley to the west of London and Paris’ western business district (WBD) could begin to offer very attractive investment opportunities.