Lending terms for prime European office properties remained steady between the second and third quarters of 2021, according to data from CBRE’s latest European Debt Map.
The property consultancy recorded little change for core office markets in Q3, as equity and debt pricing remained stable.
The leverage offered by lenders across European office markets was largely unchanged, with most loan-to-values remaining in line with Q2 figures.
Paris was the only market in which there was movement in LTV, which rose from 55 percent to 60 percent.
According to CBRE, this uptick was accompanied by a “commensurate rise in margins”, which moved from 120 basis points to 130bps.
There was more movement in margins than in leverage, with three markets – London, Helsinki and Oslo – all seeing quarterly drops in loan pricing.
However, increasing swap rates led to the cost of debt rising in London and Oslo, which posted increases of 15bps and 20bps, respectively, as the rise in swap rates “more than offset the decline in margin”. Copenhagen and Paris were the only other markets in which the the total cost of debt rose.
CBRE observed a continuing clustering of pricing, with many of the G7 and ‘rest of the west’ markets recording pricing in the 1 percent to 1.4 percent range. The “outliers”, according to CBRE data, were London, Oslo and Budapest, which recorded pricing of less than 2.5 percent, while the remainder are recorded in the 1.65 – 2.15 percent range.
Despite a return of liquidity to the retail credit market, transactional activity remained suppressed as the sector continued to suffer from the long-term economic effects of the pandemic.
Perhaps unsurprisingly, lenders view traditional shopping centres as a challenge and are gearing their preference towards supermarkets or food-anchored assets.
However, pricing was stable in Q3, which had not been the case for some time, according to CBRE.
Prime retail LTVs remained unchanged across all markets, while margins only fell in Oslo, which saw a dip of 10bps between quarters.
Rising swap rates, as seen in the prime office market, drove an increase in the total cost of debt in London, Copenhagen and Oslo.
This new-found stability in the numbers recorded in Q3 “perhaps reflects that after structural and pandemic-driven upheaval, lenders are beginning to understand which formats retain their confidence over the medium term”, CBRE said.
Uncertainty shrouds certain subsectors within retail. However, CBRE suggests that those assets for which there is evidence of relatively consistent rent and yield pricing across a number of similar transactions or valuations can be underwritten by lenders more confidently.
In the logistics sector, there was once again borrower-friendly pricing movement, with LTVs remaining stable and margins inching downwards in several prime markets, up to 15bps.
“Weight of money continues to drive best pricing in the logistics sector, as lenders follow investors in increasing exposure to the best-performing sector of recent years,” CBRE said.
Potential interest rate rises spell higher property debt costs
The third quarter saw the continuation of a trend that had been visible throughout the year: the rising cost of debt, due to increasing swap rates in key markets, particularly the UK and Norway.
This has led to borrowers making interest rate risk management a primary consideration, according to CBRE, as market participants expect central banks’ rates to rise to counter inflation risk.
The UK five-year swap rate stood at its highest level since 2019 at the end of Q3, reaching 1 percent. This was a rise of 81 bps for the year to date, which is still not as steep as the rise recorded in Norway – a 121bps increase to 1.72 percent since May 2020.
Although these swap rates hit record highs, CBRE data shows that the euro swap rate rise has been less dramatic, increasing from -0.49 percent in October 2020 to -0.19 percent in September 2021.
The consultancy noted this had not affected its Debt Map pricing, because it assumed a zero floor when compiling its figures. However, it added: “Movement since the quarter end… suggests that rising swap rates may be pushing the total cost of debt up in euro-denominated markets too.”
The shift in borrowers’ priorities towards interest rate risk management is nothing new for lenders, which for many years have made this an issue of primary importance. However, the trends recorded by CBRE data and the changing market conditions are hard to ignore, with the consultancy claiming that rising interest rates could be the main driver of change in real estate credit pricing.
Logistics pricing down in key markets, but overall cost of debt increases
There has been a borrower-friendly pricing movement in recent years in logistics, which remains one of the strongest, best-performing sectors.
This movement continued in Q3, according to CBRE, with LTVs remaining steady in 18 markets and rising in two: Portugal and Spain. Margins decreased in four prime markets, with the UK experiencing the largest decline of 15bps. As a result, the total cost of debt fell in Portugal and Spain, while the rising swap rate – a trend noted throughout the research – pushed the total cost of debt up in the UK, Denmark and Norway.
These rises in the total cost of debt in three key markets led to overall debt ending Q3 being more expensive on average, at 1.94 percent versus 1.92 percent across all markets.
Beds: Private rented-sector housing loan pricing tightens, while student accommodation remains wider
The third quarter of the year saw residential investment volumes across Europe hit a record-breaking high of €24.7 billion, according to CBRE. The consultancy believes the asset class is becoming more mainstream, with debt pricing down as lenders compete to finance assets.
The private-rented sector has seen a surge in popularity in the past two years as “its defensive qualities have shone bright” during the pandemic. In Brussels, Amsterdam, Paris, Frankfurt and Zurich, loan-to-values for PRS in Q3 were identical to those for prime offices, while margins for PRS were the same or lower.
Purpose-built student accommodation is also in demand from investors and lenders, albeit to a lesser extent than PRS. As a result, pricing benefits are yet to be fully shown in the PBSA asset class. Data from CBRE shows that in a majority of the markets covered, margins are higher than those for PRS, which the consultancy suggests shows less liquidity. It adds that “in some cases, maturity of the underlying asset class is deterring some lenders”.