Spanish real estate lending margins have experienced downward pressure in the past five years due to increased competition among debt providers, the first Spanish lending study released by Cass Business School on 14 November reveals.
Margins for senior investment loans offered in Spain averaged 244 basis points in 2018, down from 330bps in 2014. Fierce competition among lenders saw insurers offer the lowest loan margins, at 150bps last year. Debt funds offered senior loans with the highest margins at 488bps, aimed at financing developments and more complex deals. Spanish banks and international banks, meanwhile, offered senior debt at 180bps and at 160bps respectively.
Competition among lenders has increased due to Spain’s expanding economy over the last five years, making the country one of the fastest growing in the eurozone, the reports notes.
“When it comes to new commercial real estate lending, there has been a return of not only German banks but also other international banks, mainly French, as well as insurance companies,” the report says.
Interviewees said margin compression comes as a result of increased competition among lenders and the high demand for loans. In prime areas of Madrid, for instance, senior margins are well below 200bps. According to the survey, minimum margins for prime property can be achieved at 125-150bps.
Property lenders originated €4.7 billion of loans in 2018, with international banks accounting for 45 percent of total origination. Domestic banks were the second largest debt providers, originating 30 percent of 2018’s new debt. Meanwhile, debt funds and insurers provided 15 percent and 10 percent of total loan origination, respectively.
Alternative lenders have been increasing loan origination since the crisis, the report notes, which has led to more diversification and market specialisation. However, the market for senior debt is still dominated by the traditional banks.
Consequently, non-bank lenders have increased appetite to lend in the segments where traditional banks do not tend to provide finance, such as bridging loans or development finance for multifamily, senior housing or student accommodation.
“A new niche that is opening up for international debt investors is in new constructions for commercial, logistics as well as residential assets, where bank lending is more restricted. However, it is important to find the right project and development partner,” says Nicole Lux, co-author of the report, along with Mariana Mazzaferri. “Student housing development is also one of the areas of increasing interest and developers are looking to find sizeable projects.”
Given the restrictive lending terms offered by traditional banks, with loan-to-values below 60 percent, alternative lenders are also finding lending opportunities in mezzanine finance, offering loans with margins ranging from 440bps to 1,100bps. Although subordinated debt is a growing sector, demand is still limited, the report notes.
In terms of regions, the city of Madrid attracted 41 percent of total debt origination in 2018, followed by the south of the country with 27 percent, the north with 18 percent and the Catalonia region with 14 percent. This region experienced an increase in real estate debt up to 2013, reaching its highest peak of 32 percent, however lending volumes decreased in subsequent years. Since the Catalan referendum, transactions have declined sharply in this region in favour of an increase of commercial real estate debt in the south of Spain.
An asset type gaining momentum is hotels, where lenders’ exposure level has increased steadily, from 9 percent in 2001 to 32 percent in 2018. Many surveyed lenders said they provide investment and development loans for well-known hotels and operators with good track-record. The hotel sector experiences maturity and increased confidence, given the high demand within the tourism and leisure industry, the report notes.
Despite the retail crisis in markets like the UK, this sector still attracts the second largest proportion of finance in Spain, accounting for 31 percent of total loan volumes originated last year. Spain continues to have strong retail performance in key locations, the report says, as e-commerce penetration is not as acute as in other parts of Europe and the retail experience, with most of the shopping centres offering leisure for families, being part of the Spanish culture.