CBRE sees signs of stabilisation in Q4 senior lending terms

Senior lenders continued to reduce loan-to-values and increase margins for prime European real estate during Q4 2022, according to CBRE. However, the property adviser’s figures showed there were signs of debt terms stabilising in sectors including offices and multifamily residential.

CBRE’s latest European Debt Financing Review showed average senior LTVs continued to decline across prime European markets in Q4, while average margins increased for a fourth consecutive quarter. The total cost of senior debt increased again, albeit by significantly less than in the preceding two quarters.

Despite the overall continued tightening of LTVs and increases in margins, CBRE noted relative stability in debt terms in several locations for some sectors.

LTVs for senior office loans in the markets it monitors were recorded as stable between Q3 and Q4 in all but two markets – Paris and Madrid. Average LTVs across all locations were found within a 50-55 percent range by the end of the quarter.

While prime office margins were up in Paris and Brussels, CBRE said markets had benefited from “some stabilisation in the economic outlook”.

The adviser noted prime office yields increased in Q4. “This will impact collateral in existing loans, but it also suggests an improvement in debt yields and interest coverage ratios for new loans,” it said.

“Lenders are likely to remain selective in what they finance, and investors may need to inject additional equity or subordinated debt to refinance office assets, given movements in values and loan terms,” it added.

Logistics leverage

In the prime logistics sector, loan terms were either similar to during Q3, or were more conservative, CBRE noted.

LTVs for new senior loans were largely stable, following downward adjustments in Q2 and Q3. Meanwhile, margins increased in only three markets. CBRE pointed out this followed upward revisions to margins across most logistics markets in Q2 and Q3.

Prime yields rose in Q4 to a greater extent than for offices and retail, although the adviser said many logistics assets have benefited from increases in value over recent years. “Any impact on refinancing will depend on investment timing and the original loan terms,” it said.

Multifamily terms stabilise

For the second consecutive quarter, CBRE recorded prime multifamily lending terms. It said debt remained available for prime assets, with terms stabilising in Q4.

LTVs fell in France and remained stable elsewhere. Typical margins for new senior loans increased by 20bps in Belgium, France, and the Netherlands, but fell by 5bps in Ireland.

“While not immune from weaker economic conditions, multifamily residential investments have different performance drivers to other property types, from which investors and lenders might benefit,” CBRE said.

Contrasting trends for retail

For prime retail property, CBRE noted “contrasting trends” in debt terms across European markets last quarter.

LTVs typically fell or remained stable, with most in a 50-55 percent range. However, senior loan margins for prime retail increased in three markets and decreased in three others. The firm noted falls in margins during Q4 occurred in cases where the reported margin was already relatively high.

“While location and tenant covenant are key for all locations, there is diversity in what retail format is considered to be prime,” CBRE wrote.