The total volume of new debt issued against European commercial real estate in 2016 was €116 billion, reflecting 46 percent of investment transactions totalling €255 billion, CBRE Capital Advisors has estimated.
That total was down from an estimated €125 billion in 2015, but up significantly from €68 billion in 2013 when the market was in recovery mode, according to the firm’s European Commercial Real Estate Finance 2017 update.
The total nominal value of European commercial real estate investment debt decreased slightly during the course of 2016, the research showed, from €1.14 trillion to €1.06 trillion, which CBRE largely attributed to reduced levels of investment transactions during 2016. However, the amount of new debt issued during the year essentially matched the amount of old debt that was retired.
“Politics took over from economics as the main driver of the financial markets in 2016,” CBRE said. “As a consequence 2016 was a year of volatility, but one where on the whole there was no outright change in overall trends.”
With the exception of a jump in the UK immediately after the EU referendum in June, senior lending margins for good quality property were stable in most European countries during 2016. For secondary properties and lending at higher loan-to-value ratios, there was evidence that lending margins increased during the year.
Although the upward trend in US interest rates paused in the last months of 2016, CBRE’s house view is that this was the start of a longer-term trend and that a ‘normalisation’ of medium and long-term interest rates will be see in the next few years. Although European borrowers will have to cope with an increasing trend in the overall cost of debt in 2017, the increase will be fairly small.
Higher interest rates will have an impact on the direct investment market, reinforcing the view of many that, at least for prime property, yields are probably at their floor for this cycle, CBRE said.
Almost exactly half – 49 percent – of European commercial real estate debt is due to mature over the next three years. In 2017, 57 percent of debt due to mature will be the product of refinancing rather than new lending maturing for the first time.
On pre-crisis legacy debt, the research noted that it is a relatively small proportion of Europe’s total debt pile, with most historic loans now capable of being refinanced due to the general recovery in asset values across the continent.
The fact that in most of Europe the development cycle has not yet meaningfully restarted suggests that loans against development land will still be out of the money in most cases, CBRE said.
There was a slowing of activity in the loan sale market during 2016. Indeed, last year was the first since 2012 that real estate secured loan sale activity fell. However, CBRE argued that this is a “mid-cycle pause” reflecting uncertainty in the wider market rather than a structural decline in loan sales. Activity is expected to pick up in 2017, although it will be focussed on specific countries including Italy and Spain, CBRE predicted.
Regulators are applying more pressure on banks to accelerate the pace of non-performing loan reductions and greater provisioning by banks gives them greater opportunity to sell. Demand for NPLs remains strong, with buyers believing they can deliver greater returns than the originating banks through proactive strategies. CBRE is tracking €66.8 billion of dry powder among loan purchasers across the globe, the majority of which is from the US.
The loan-on-loan market is still strong, albeit lending margins have stabilised and, where available, loan-to-cost levels of up to 70 percent provide support to pricing, CBRE added.