Bayes: Continental European borrowers face 6% all-in debt costs for prime assets

Sharp rise in financing costs is highlighted in pan-European research report.

Borrowers in Continental European real estate markets are paying all-in interest rates of as much as 6 percent for variable-rate loans on prime properties, according to research published by London’s Bayes Business School.

In a pilot pan-European report – Bayes Business School European Commercial Real Estate Lending Report – the institute found the total cost of debt for the best assets, including the Euribor rate, ranges between 4-6 percent in key continental European markets, up from a range of 2-3 percent a year ago.

The average total cost of debt for prime assets in the UK is higher than 6 percent, the report added, due to more expensive SONIA rates.

“Especially for the [Continental] European property market, where property yields for prime offices have been ranging from 2.75 percent to 3.5 percent, the level of financing rates cannot be sustained and are forcing property values down or leaving borrowers stranded,” the report said.

Bayes, which is best known in the industry for its biannual UK property lending report, reached out to 1,100 banks, insurers, and debt funds across Europe, receiving responses from 8 percent. Respondents include bank lenders, with a strong showing from German banks, and pan-European debt funds. The report examined lending behaviour and loan terms up to February 2023.

“Banks are quite consistent in their approach to loan pricing across prime locations such as Paris, Berlin, Madrid,” report author Nicole Lux, senior research fellow at Bayes, told Real Estate Capital Europe. “So, there is a narrow range of pricing for prime real estate in the major European capital cities. With equivalent borrowing costs, European investors need to think carefully about future returns when acquiring an office property in Berlin versus Madrid.”

As well as lending terms for prime property, Bayes asked lenders to provide information on loans for repositioning projects and opportunistic assets – which it found to be priced around 60-100 basis points wider than for prime.

“We saw a clear difference in pricing, which is comforting to see, as there was a convergence of pricing regardless of asset in the last cycle, prior to the global financial crisis,” explained Lux.

“The 4-6 percent pricing [for prime, stabilised assets] is inclusive of three-month Euribor, and the margin for stable assets is within a 120-200bps range, with 150bps as the average. Opportunistic assets are financed within a margin range of 200-300bps, with an average of 250bps,” she added.

Pricing differs considerably by loan size, Bayes reported. Loans within the €20 million to €50 million size range attract the lowest and most competitive lending rates – between 1.5 percent and 2.5 percent variable margin for a five-year loan plus Euribor.

“Above €100 million, deals get more complex, and lenders are able to charge more,” Lux said. “On the other hand, lenders also charge much higher rates on loans below €5 million, as there are simply fewer available lenders.”

Bayes found little consistency in junior financing rates, with significant differences by type of asset, location and lender type. For repositioning and development projects, it showed that mezzanine margins are typically around 15 percent on a fixed basis, including all fees, with loan-to-values ranging from 70 percent to 92 percent.


Bayes also examined the amount of leverage on offer from different lender groups. It found that German banks offer some of the highest LTVs for investment assets, at between 75-80 percent, and 77 percent-82 percent loan-to-cost for development lending.

It noted that other European bank lenders are more conservative, with LTV for investment loans within 55 percent and 60 percent, and LTC for development in a 60-75 percent range. The market’s lowest reported LTV levels were for repositioning assets, as low as 35 percent.

The report also highlighted the domestic focus of many banks. Of those that responded, 92 percent lent only in their home market, with the remainder lending across Europe without external subsidiaries or branches. In comparison, only 38 percent of debt fund managers that responded pursue a multi-country strategy.