Caution in European RE, but loan books growing

It’s a mixed picture in European real estate lending, with volumes increasing in Germany, the Benelux and Nordics, but declining in the UK, according to the latest European Lending Survey for Spring 2017 from Cushman & Wakefield.

The survey finds that lenders remain focused on the “Big 3” core markets of the UK, Germany and France. However, lending in the UK has fallen with demand for credit slowing in the face of geopolitical risk following the EU Referendum vote.

Lending in the Benelux and Nordic markets has increased since the previous survey, thanks to “strong underlying fundamentals”, though this is offset by a decline in Southern European and Central and Eastern European markets.

More lenders reported growth in originations in the second half of 2016 and, moving forward, 30 percent expect originations to grow further. Lenders also expect further expansion of their loan books. However, re-financing, which has been expanding, looks set to be somewhat weaker over the next six months.

While senior debt remains the preferred loan structure for most lenders, its share has fallen over the last 12 months at the expense of stretched senior and mezzanine finance. Stretched senior is now the preferred choice for 20 percent of lenders, compared with 10 percent a year ago. Whole loans have dropped, even though the survey has not observed any decline in lenders willing to offer them.

While lending remains focused on prime assets and locations, investors struggling to source prime assets in tier one markets are seeking out ‘build to core’ opportunities in secondary or development markets. Those targeting non-prime and pre-let development in tier one markets has increased in the last six months and is expected to continue over the next six months.

When it comes to LTVs (loan-to-value), these have been rising in most markets back to levels seen a year ago. In major cities LTVs are typically around 60 percent, which is low by historical standards. Margins have risen from sub-200 bps a year ago to above 220 bps in most markets today, although Paris continues to see margins below 200.

Looking ahead, the impact of elections is seen as broadly neutral although views vary widely on political developments, especially in relation to the UK’s EU exit. With interest rates ‘lower for longer’, the current cycle is tipped to be extended although lenders remain cautious in the face of the tightening regulatory environment.

The survey is the fifth of its kind and is based on responses from a variety of organisations including commercial banks (almost 50 percent), institutions (19 percent) and debt funds (15 percent).