Borrowers in the European real estate debt markets face a dilemma; when loans come due, do they sell assets or refinance?
With large volumes of debt due to mature in the coming few years, proactive lenders stand to benefit by locking in their clients’ business for another loan term.
Figures from CBRE at the end of 2016 give an idea of the wall of debt maturity Europe faces. More than €450 billion of commercial property debt is due to be repaid between 2018 and 2021. As real estate markets recovered in the first half of this decade, investors took on five- to seven-year leverage to support their strategies and are now scratching their heads about what to do next.
These are uncertain times for owners of commercial real estate. Market fundamentals appear strong across many sectors and countries, although political and economic risks weigh on landlords’ minds. This is particularly acute in the UK, where the impending exit from the European Union is clouding the future. At sister publication PERE’s UK roundtable, coverage of which is published next week, participants admitted they would ideally sell all their real estate and wait it out for the country’s market cycle to shift.
Borrowers are also aware they currently benefit from very favourable debt terms. The European credit markets are liquid, with competition between lenders strongest in the senior space. However, interest rates are likely to rise – in the UK, at least – and increased banking regulation under Basel IV could also force loan pricing upwards. The era of cheap debt is far from over, but many property investors across Europe are planning to hold core assets long-term to benefit from the steady income they produce; securing low-margin financing for the foreseeable future will be on many agendas.
The topic was addressed during a panel discussion at last week’s Loan Markets Association Real Estate Finance conference in London. One lender noted clients testing the water to sell assets, but with the market in a period of price discovery, several of those processes culminated in refinancing deals. A banker remarked that UK sponsors are asking for renewed finance to get them through to 2021-22, when the country’s place in the world might look a little clearer. Another banker noted reduced dealflow, adding how getting in front of clients’ decision-making is important nowadays.
Cass Business School figures highlight the market’s continued focus on refinancing. A slim majority of last year’s new origination – 51 percent – was accounted for by refinancing rather than acquisition funding. The refinancing proportion was down compared with 2016, when it accounted for 61 percent of the market, although back in 2015, the balance was weighted towards acquisition finance, which represented 55.6 percent of new loans.
Clearly, people are still buying and selling European real estate. Indeed, last year’s investment volumes were a record €286 billion, up 9.3 percent on 2016, according to CBRE. However, this activity did not all translate into business for lenders, with cash-rich investors and Asian buyers supported by credit from their home region taking a large slice of business.
Refinancing will continue to be a major component of the business available to lenders in European markets in the coming few years. In a competitive sector, with plenty of new entrants aiming to build loan books and established lenders fighting for market share, lenders cannot take repeat business from clients for granted. However, as property owners consider the future of their real estate holdings, it is a good time to be an incumbent lender.
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