Property lenders in Europe continue to demonstrate a “risk-off” approach to business due to the impact of the covid-19 pandemic, investment manager AEW has concluded in new research shared exclusively with Real Estate Capital.
AEW noted that, across 240 loans added to its in-house database of European real estate debt deals in 2020 and 2021 to date, not a single transaction reflected a loan-to-value ratio of 80 percent or more.
The manager said those 2020 and 2021 loans recorded in the data with an LTV of between 70 percent and 79 percent were priced at a significantly higher average margin than loans in the same leverage bracket recorded between 2010 and 2019 – up 150 basis points to 3.9 percent.
Hans Vrensen, managing director, head of research and strategy at AEW, told Real Estate Capital the findings demonstrate a more risk-averse approach by lenders as they reduce exposure to higher risk loans and demand higher margins further up the risk curve.
“We were a little surprised by the LTV analysis – not only that there were no deals in the 80 percent-plus bucket, but that the 70 percent to 79 percent bucket showed a big increase in margin,” Vrensen said. “That shows lenders, if they are taking the risk, want to be compensated more for it.”
AEW’s data sample, compiled from its in-house debt and equity businesses and external sources, comprises around 1,250 loans dating from 2003. Vrensen said the data captures a sample equal to around 10 percent of annual total acquisition debt, providing an indication of the overall market.
While Vrensen explained AEW’s loan data typically captures more senior loans than high LTV facilities, he said there was a notable drop in the number of high LTV loans that are included in the data since the onset of the pandemic.
“In my view, this data shows banks are either not interested in doing high LTV loans, or they want to get paid at a much higher margin than previously,” he added. “There are still opportunities for lenders that want to take risk, and they get paid a lot more for them.”
Across AEW’s data, average margins for mid-year 2021 were 2.7 percent – the highest level since 2003. Vrensen added that, given the near zero level of base rates, all-in interest rates were stable at below 3 percent.
The manager also estimated that debt to fund new acquisitions was in the order of €129 billion in 2010, around 15 percent down from 2019. It added that, across the European market, the average annual acquisition LTV remained at less than 50 percent.