Cost of European real estate debt falls

Falling interest rates across Europe saw the average cost of European commercial real estate debt reach its lowest full-year figure in the fourth quarter of 2018, according to new data from CBRE.

'As the hunt for yield across Europe intensifies, we are seeing traditional equity investors increasingly diversifying into the debt markets,' noted Paul Coates, head of European debt and structured finance at CBRE.

'This has increased competition in the lending markets across a wide spectrum of real estate, meaning that the pressure to deploy is now arguably greater on the lender than it is the borrower. This is good news for those looking for sponsors and our outlook for 2019 remains positive,' Coates added.

CBRE’s quarterly European debt map shows a general trend for declining costs over the quarter, driven largely by a decrease in interest rates. Five year swap rates (which are used as a proxy for the interest rate component) fell in each of the 20 countries over the quarter, trimming an average of 19bps off the total cost of senior debt.

As a result, the total average cost of senior debt across the whole of Europe ended 2018 at its lowest full-year level at just 2.12% (versus 2.34% at the beginning of the year). Generally, other than the swap rate component, key lending terms saw little change over the fourth quarter, although a few countries bucked the trend.

Country costs
Three countries saw lending terms shift definitively in favour of the borrower, as Ireland's margins fell 20bps to 1.30%, with LTV remaining static at 60%; Norway's margins fell 10bps to 1.70%, with LTV remaining static at 65%; and Poland saw both margins fall slightly and LTVs rise, to 1.80% and 70% respectively.

By contrast, lending terms moved against the borrower in Italy, which saw margins rise 20bps to 2.00%, with LTV remaining static at 60%.

Three countries saw a more nuanced change in the balance of fortunes. In Portugal, Sweden and the UK margins and LTVs both moved, in similar and therefore balancing directions, such that overall there was little in the way of a decisive shift in favour of either borrower or lender.

Portugal and the UK both saw LTVs rise, by five percentage points to 60-65% and 60% respectively, and margins also rise, by 25bps in the UK and to 1.85-2.50% (from a simple 1.85%) in Portugal.

In Sweden, the trend was the opposite, as LTVs fell by five percentage points to 60% and margins also fell 5bps to 1.25%.

Over the course of 2018, the total cost of debt fell in 14 countries, rising in only six. The average cost of debt across the 20 countries fell from 2.34% to 2.12%. Margins fell in ten countries, rising in five and remaining flat in five. The average margin across the 20 countries fell from 1.82% to 1.67% – accounting for the bulk of the decline in total cost of debt. Swap rates fell in 17 countries, rising in three.


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