Eastern Europe top region for real estate debt

Both lenders and borrowers can find the best real estate debt market conditions across selected central and eastern European cities, research published by CBRE suggests.

Considering projected returns against a range of factors that affect debt terms, Budapest, Bucharest and Warsaw emerged as the most mutually friendly cities for lenders and borrowers to do business, the consultancy’s inaugural European Real Estate Debt Map showed.

Milan and Oslo completed the list of the top five European locations in which both sides of the debt equation were deemed to find the best conditions.

The consultancy compiled data on 20 European cities. While, purely from a pricing perspective, the firm said lenders should consider less core markets, other factors including scale, liquidity and regulatory conditions need to be factored in to assess a location’s overall favourability.

“Lenders willing to move beyond core markets will be rewarded with higher returns, as indeed they should be, given the lower liquidity and lack of maturity in many peripheral locations,” explained Marco Rampin, head of debt and structured finance for continental Europe at CBRE.

“Whilst larger, more established markets may seem less appealing, lower returns may be compensated for by scale and perceived security,” he added.

Exclusively from a lender perspective, London, Dublin and Lisbon were noted as favourable locations, although each was deemed less so for borrowers, with London emerging as the least borrower-friendly location in Europe.

Amenable borrowing locations were spread across Europe, including Berlin, Madrid and Amsterdam in western Europe; Helsinki and Stockholm in the Nordics; and Bratislava, Prague and Budapest in central and eastern Europe.

Five cities were deemed to be unfavourable to both lenders and borrowers; Paris, Brussels, Copenhagen, Vienna and Zurich.

Each of the 20 markets was examined on various metrics. For lenders, that meant the debt yield – the property yield adjusted for the loan-to-value of the senior loan – compared with the property yield. A higher debt yield indicates greater downside protection for the lender.

In this analysis, most western European markets saw a debt yield in the 6 percent to 7 percent range, with France and Germany each lower at 5 percent. Hungary, Romania and Slovakia all had debt yields at or above 9 percent.

Debt yield was also compared with the property yield minus the total cost of debt, with a smaller gap between property yield and debt cost indicating where borrowers might be most at risk from inability to make loan repayments.

When comparing western European markets, CBRE concluded that lenders should be wary of Norway, Italy, the UK and France. Less risky markets include Spain, Germany, and the Netherlands. Smaller markets typically offer more protection on this basis, although the lower level of liquidity and potentially recourse to the underlying asset are key factors in this. However, Poland is a notable exception, the report noted.

For borrowers, the firm examined the gap between the total cost of debt – expressed as the five-year swap rate, plus margin and arrangement fees – and the property yield. The gap was narrow in the larger western European markets including the UK (1.2 percent) and Germany (1.5 percent), with the Netherlands an exception at 2.4 percent. In eastern Europe, Slovakia and Hungary had gaps at 4.1 percent and 2.9 percent, respectively.

The gap between the property yield and the cost of debt as a proportion of the property yield was also examined, with a higher percentage indicating a benefit to the borrower due to greater additional income above the cost of debt.

The results were deemed “surprising”, with CBRE highlighting a cluster of countries not immediately recognised for offering synchronicity in debt pricing. Switzerland has the largest proportional gap between cost of debt and property at more than 70 percent, followed by Belgium at around 65 percent, Slovakia at more than 60 percent and the Netherlands at almost 60 percent.