Debt terms will be tighter, costlier and greener, French lenders tell CBRE

French real estate lenders anticipate offering loans with tighter loan-to-value requirements, higher margins and provisions for borrowers with sustainability business plans, amid concerns about the impact of rising rates on valuations, according to a survey.

The majority of lenders that took part in the survey for property consultant CBRE, the first lender intentions survey of French debt providers conducted by the firm, found respondents expect a moderate to significant increase in margins on loans for core assets.

For those financing core real estate, 38 percent expect margins to increase by between 10 and 20 basis points, and 29 percent expect over 20 basis points. In addition, 71 percent of lenders are requiring full coverage of interest rate risk via caps or swaps.

The survey – of 77 debt providers active in France, conducted between March and May 2023 – reflects concerns over rising interest rates, the fear of recession and uncertainty about real estate valuations, CBRE said.

However, 92 percent reported they would consider green criteria in their credit decision-making in 2023, despite the turbulent backdrop.

Shifting cap rates

In total, 87 percent of respondents cited a likely shift in cap rates as being the major challenge for 2023. As a result, when asked about financing terms for core property, 42 percent said they anticipated a decrease of between 5 and 15 percent in the LTV they will offer to borrowers.

Asked about lending terms more broadly, 78 percent said they planned to be stricter on requirements towards borrowers during the underwriting process.

“While we should not expect a credit crunch in 2023, credit will be become scarcer, more expensive and lenders will become more demanding,” Fabrice Rimlinger, senior director of debt and structured finance at CBRE, and the report’s co-author, told Real Estate Capital Europe.

Larger lenders were most pessimistic in their expectations around lending volumes. In total, 89 percent of firms with an annual origination of over €1 billion expected a decrease in issuance in 2023 versus 2022; 67 percent of firms with origination of between €500 million and €1 billion also said they anticipated a reduction in lending.

ESG roadmaps

But CBRE reported lenders had “not abandoned their ESG [environmental, social and governance] roadmaps”, with a third saying borrowers meeting these standards could receive a higher LTV as a result. “This is because assets theoretically have a better risk profile – especially in terms of occupancy – and could therefore justify less stringent covenants from the lender,” said Rimlinger.

In addition, 49 percent stated they are open to a step down in margins over the loan term when financing real estate assets that adhere to their ESG criteria. Furthermore, 55 percent said they expected to move in this direction in the next 12 months.

Important criteria for lenders, the survey showed, was energy management and consumption and a reduction in carbon emissions. Lenders also gave credence to certifications such as BREEAM, HQE and LEED, which rate and assess the sustainability of real estate.