CBRE: Increased uncertainty forces cost of debt up in Q1

The cost of debt increased overall in Q1 2022, remaining stable only in Zurich, according to real estate investment service CBRE.

Inflation concerns and the increased uncertainty in Europe following Russia’s invasion of Ukraine has resulted in a higher cost of real estate debt, according to CBRE’s latest European Debt Map.

The real estate consultancy said that in Q1 2022, lenders remained focused on prime product due to pressures on pricing. Loan-to-values remained stable across the region, while lending margins came under pressure during Q1 due to increasing bank funding costs. Margins increased in 12 of the markets monitored by CBRE, with the most notable change recorded in Frankfurt, where they increased by 30 basis points to 130bps, closely followed by Vienna and the Nordic markets.

The cost of debt increased overall in Q1 2022, remaining stable only in Zurich. All other European markets experienced considerable rises, particularly in the G7 countries, which recorded a rise of 104bps in the first quarter of the year – the highest level since 2014, according to CBRE.

Overall debt pricing for G7 countries and Western Europe was in the 2.15-2.95 percent range in the first quarter of the year, excluding Lisbon, Zurich and London, which respectively recorded debt pricing of 314bps, 100bps and 379bps. In May, the Bank of England increased UK interest rates to 1 percent, the highest level since 2009. This was reflected in the region’s higher cost of debt, despite LTVs and margins remaining stable from the previous quarter.

CBRE European Debt Map Q1 2022

Retail credit market holds steady

Sentiment towards prime retail lending remains stable despite continued caution in certain segments of the market

CBRE’s data shows that an increase of funding costs and risk premia prompted lenders to increase margins in the retail sector in the first quarter of 2022. Despite this, caution remains in the traditional shopping centre segment and fashion-led retail schemes, according to the real estate consultancy.

All but two markets, Dublin and Lisbon, recorded stable headline LTVs, reflecting the ongoing improvement in sentiment in supermarkets and food anchored retail warehousing. Most markets featured LTVs of 55-60 percent in CBRE’s Debt Map survey. However, the outliers are London, Dublin and Milan; regions recording 50 percent where retail stock per capita is higher.

In the first quarter of 2022, there was a moderate rise in margins due to the rising interest rate environment across all European markets measured in CBRE’s data, with Scandinavia recording the biggest quarterly rise at 22bps.

As with the office market, rising swap rates across Europe and moderate margin increases impacted the total cost of debt during Q1, according to CBRE. All countries measured by the consultant saw an increase in the overall cost of debt, with rises recorded between 85bps and 140bps. As with margin rises, Scandinavia recorded the greatest increase in the cost of debt during the quarter, at 124bps.

Prime retail lending sentiment Q1 2022 versus Q4 2021

Continued confidence in the logistics sector

  • Logistics attracted approximately 20 percent of overall investment across Europe in the first quarter of 2022, according to CBRE, showing continued confidence in the sector. The resilience of the logistics sector is reflected in the Debt Map survey, as LTVs remained stable across all European markets in Q1.
  • Margin increases were recorded in Central and Eastern Europe and Scandinavia. However, margins in the logistics market remain “favourable compared with other traditional assets”, according to CBRE. In other European markets, lender margins remained broadly stable, only increasing in Germany, Austria and Spain by 30bps, 20bps and 10bps respectively.
  • Despite logistics continuing to be a sought-after asset, the rising swap rates have increased the cost of debt in the sector. On average, the cost of debt increased by 110bps, with the largest increases recorded in Central and Eastern Europe and the Nordic countries.