European lenders forecast continued origination growth

Almost all lenders expect new European originations to increase or remain stable in the next six months.

Some 91% of debt providers contacted by DTZ said their origination volumes will grow or remain the same in the six months to end of September 2015 compared to the previous six-month period. A similar proportion believe the same for refinancing as values continue to recover.

This follows six months between April-September 2014 when 70% reported an increase in originations.

However, according to the snapshot in DTZ’s European Lending Trends survey, lenders remain disciplined, despite evidence in core markets of LTVs being pushed up to 80% and sub-100bps senior loans completed. Ed Daubeney, head of debt advisory at DTZ, said: “There has been a willingness to move up the risk curve in Tier 1 cities, with increased lending on speculative developments, especially in core cities where the availability of Grade A stock remains low. However, this trend is not reflected in Tier 2 and 3 cities with lenders continuing to be risk averse.”

Better margins in Spain and Italy have seen the appetite to lend in both countries increase by 7%, with almost a fifth of respondents, 18%, now willing to lend in both countries compared to 11% recorded in the last survey published in November 2014 and covering Q2 and Q3 2014.

The growing popularity of Spain and Italy has seen the share of activity in the core markets of the UK, France and Germany drop to 52%, a decrease of 9% on the previous six month period. DTZ said this is a reflection of the changes in the investment market as well as the higher margins for southern European lending.

Growth is particularly noticeable in Italy where the share has increased from 4% to 9%.

The firm said in London, Paris and Frankfurt average margins have tightened to 161bps, 162bps and 164bps respectively. Average loan-to-value (LTV) ratios are 63%, 60% and 58% respectively. This compares with Madrid reporting an average margin of 210bps and Milan, 185bps.

There was a small increase in the lenders willing to provide speculative finance in core markets, up to 10% from 7% in the previous period.

Almost two-thirds of the 59 respondents came from commercial banks, who continue to dominate the lending landscape in Europe. Debt funds made up 14%, institutions 12%, and investment banks 8% of respondents.

They felt the greatest risk in lending now is the weight of capital with 58% of respondents believing it was compressing yields to new lows.

DTZ’s head of capital markets research, Nigel Almond said: “With record levels of new capital targeting real estate, prime yields are being compressed to previous, and in some cases new, lows. Although real estate is still offering relatively good value in this ultra-low interest rate environment and spreads over bond yields remain high, this could change significantly and rapidly if rates increase.

“However, our survey shows lenders are being rational and focused on risks. Thus, in the current cycle it appears that debt (and lenders) are less exposed compared to investors who are having to invest greater levels of equity.”