Competition among lenders to finance logistics is forcing loan margins down and encouraging debt providers to lend outside core markets, according to the European real estate head of ING, which closed a portfolio financing deal in the sector last month.
On 22 March, the Dutch bank announced it had provided €580 million to refinance a pan-European logistics portfolio owned by the Logistis fund, managed by investment manager AEW. The portfolio comprises 42 existing and under-development assets across Germany, the Czech Republic, Poland and the Netherlands.
AEW said in a statement that the refinancing, along with a €660 million refinancing of its French assets with ING in June 2020, enables it to continue its build-to-core strategy focused on creating strategic assets, from large multi-modal logistics parks to urban logistics platforms.
According to Mike Shields, ING’s EMEA head of real estate finance, the quality of the real estate enabled the borrower to benefit from a “flexible and competitive” financing package.
He added that the transaction was conservatively leveraged, below the average loan-to-value ratio for logistics assets. “It is low leverage, which gives us more flexibility on other structural points,” he said.
ING, which was sole underwriter, syndicated the loan to lenders including German banks pbb Deutsche Pfandbriefbank and Berlin Hyp, Irish bank AIB and Dutch investment manager NN Investment Partners.
Speaking to Real Estate Capital, Shields said that, across the European market, intense competition for logistics financing had led to a reduction in loan pricing: “In 2021, pricing is getting lower. We are seeing some clients demand lower debt pricing and higher leverage as they seek higher returns. For high-quality portfolios, we see sub-200 basis points loan pricing.”
According to Shields, debt pricing is getting tighter in non-core European markets. “Competition is getting so hot in core markets like Germany, France or the Netherlands that lenders are starting to move into countries that had traditionally presented some structural barriers to them,” he said. “This is the case with Portugal, Italy and central and eastern Europe. Therefore, the pricing premium you would have historically enjoyed in non-core European countries is going away.”
Shields has noted a steep rise in logistics asset pricing during the last nine months. For him, this rise in investment market pricing is “scary” from a lending perspective, and is the reason banks should be conservative in their lending terms and stick to “reasonable” leverage levels and debt yields: “Investment yields are down to 4,5,6 percent from 6,7,8 percent, so there has been a large value increase in the last nine months.”
Shields added that lending terms for prime logistics have become akin to those for prime offices: “We were used to financing logistics assets at much different levels. Now, there is little difference between financing a class A office building in the central business district of Milan and a brand new logistics facility long-let to an investment-grade tenant, located 30 kilometres outside of Milan, since these are trading now at similar investment yields.”
Shields expects a strong pipeline of financing opportunities in the space, given the solid underlying demand from property investors. “Until we get the right amount of supply to match existing tenant demand, which is still a way off, there will be many financing opportunities in the market,” he said. “We are seeing a good amount of construction in some markets, but the shift to online retailing has created so much demand that we will be busy with logistics for years. The pandemic has accelerated this tenant demand.”