The cost of borrowing has doubled in a year across European real estate markets, according to a maiden pan-European debt survey.
The first Bayes Business School European Commercial Real Estate Lending Report finds that the all-interest cost for a loan on a prime asset has climbed from 2-3% a year ago to 4-6%.
The report says: ‘Where property yields for prime offices have been ranging from 2.75% to 3.5% the level of financing rates cannot be sustained and are forcing property values down or leaving assets and borrowers stranded.’
The report, published in March, covers data up to February 2023 and was carried out between December 2022 and February 2023. Author Dr Nicole Lux – who also produces the twice-yearly UK Bayes (formerly Cass) lending report – contacted 1,100 lenders across Europe, 828 of which were banks and 299 were alternative lenders.
For junior loans, rates offered vary widely depending on the type of asset, location and especially type of lender. ‘Rates can be specifically high if there is little appetite from lenders to lend on an asset class, leading to very limited supply/debt liquidity’, the report observes, with the cost of junior finance for development or repositioning typically around 15%, fixed, including all fees.
Some of the key differences between markets are:
- German banks still offer some of the highest loan-to-value for investment assets of up to 75-80%; other European lenders are much more conservative.
- Repositioning or opportunistic assets are priced 60-150 bps wider.
- At year end 2022, the lowest margins were available for stable assets in the Netherlands and France.
- In the UK approximately 30% of all loans are now fixed (reflecting the variable pricing + a benchmark rate) and in Germany it is 40%.
- Borrowers need to know the local lenders because 92% of banks are currently only lending into their home market. German banks for example lent €60-70 bn outside Germany in 2007-2006; now it is €20-25 bn.
- Debt funds are different, with 38% pursuing a multi-country strategy.
- Borrowers need to enquire ‘carefully’ about the fees charged by different debt funds because these make rates often difficult to compare.
- Generally, residential development lending is still cheaper than commercial development finance with margins ranging from 3% to 3.75%.
Lux estimates that the European CRE debt market totals €1.5 trn with an annual new debt origination amount of €310 bn (excluding private residential mortgages).
Some 55% of origination is in the three largest European real estate markets of the UK, Germany and France; in addition there are €95 bn of public real estate bonds.
Since the report was compiled, the European Central Bank has increased its interest rate by another 0.5% (to 3%) while the Bank of England made a 0.25% increase yesterday (to 4.25%), driven by persistently high inflation.
Lux was assisted by Dr Alexandros Skouralis.