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Lenders’ guide to Europe, part 4: Southern Europe recovers

In the last of our four-part series, we examine what Southern Europe has to offer lenders.


The market is well and truly on the map for a range of investors and lenders, writes Lauren Parr


Spain’s economy is outpacing much of Europe and a strong year of real estate investment is expected in 2018, on the back of a post-crisis record 2017.

Last year was the fourth consecutive year of economic expansion, with 3.1 percent GDP growth. Unemployment is down and consumer confidence high. “The situation is positive for investors. We don’t see much further yield compression but we are seeing rental growth in the office sector and for prime retail,” says Luis Espadas, head of capital markets at Savills in Madrid.

Many financing opportunities relate to offices and shopping centres, with a pipeline of €4 billion to €5 billion coming to the market or about to be closed according to Savills. On average, senior loan margins stand at 200 basis points, the agency notes.

“There was investment in the office market a couple of years ago but people didn’t see the level of rental growth they were expecting. Now, people are far more confident in thinking office rents in Madrid are going to start to rise,” says Roman Kogan, head of commercial real estate at Deutsche Bank.

There remains limited liquidity for development or refurbishment yet requests for such financing are rising, meaning those willing to take additional risk can make healthy returns. Deutsche Bank closed the financing of a refurbishment and leasing of the iconic Los Cubos office building in Madrid in October for Henderson Park, for example.

Investors are also targeting hotels in coastal locations, while there is huge appetite for logistics thanks to ecommerce.

“The housing story is a reasonably good one. Over the last six months we’ve seen a lot of people having built up land banks now executing business plans to turn them into developments for sale or rental,” says Kogan.

“Investment in alternative real estate assets such as student housing and senior living is also picking up. “These markets may be small, but there is room for yield movement and more attractive pricing differentials,” says Espadas.

Loan-on-loan lending opportunities are expected to persist, with circa €125 billion of non-core debt to be addressed according to Deloitte.


October’s Catalan crisis showed that politics have the potential to disrupt Spain’s recovery. The situation has calmed, says Espadas: “All parties involved have realised that independence is not viable and that other means of agreement within the boundaries of Spanish constitution should be found.”

Loan margins are also approaching tight levels. “We achieved similar returns in Spain as we did in central Amsterdam; it doesn’t feel like the right balance. German lenders are pricing aggressively because they face intense competition in their local market,” says Bryan McDonnell, head of European senior debt origination at PGIM Real Estate Finance.


Overseas investors from Europe and the US represented 63 percent of transactions last year, largely with a core and core-plus focus, said Savills. US private equity buyers are also active. International funds have acquired local loan servicing platforms to tap into the NPL market.


Domestic banks including Santander and BBVA have returned to the market, mainly providing smaller-ticket financings. Larger deals are attracting European banks including ING, Deutsche Bank, and Natixis, with German banks also in the market. Deutsche Hypo, for instance, has resumed lending. Debt funds remain active, including DRC Capital, M&G and Tyndaris.



The country’s real estate market is in recovery mode and offers opportunities for debt providers, writes Alicia Villegas


As the Portuguese real estate market recovers, it is offering opportunities for senior lenders aiming to finance core assets in good locations. “Portugal now is like Spain three years ago; there’s greater availability of opportunities to finance low-risk deals,” a senior banker operating in Iberia says.

Although increased competition among banks is bringing margins down, a premium to more established markets remains, sources say. Senior lenders providing conservatively leveraged loans to retail and office assets can price loans at around 2 percent, industry sources tell Real Estate Capital.

In recent years, lenders have been financing shopping centres, but booming tourism is driving new financing opportunities in the retail and leisure segment, such as high street shops in Lisbon and Porto.

The office market has also picked up, thanks to strong demand from multinational firms for back-office services. In addition, offices are set to benefit from a further decline in the vacancy rate and the rise of prime rents, due to a lack of product. Meanwhile, new opportunities are emerging in student housing and boutique hotels.


It is evident that the Portuguese economy, under a minority socialist government pursuing anti-austerity policies, has experienced great momentum. A global downturn, however, could end this, impacting Portugal’s political and economic stability and hitting property occupiers and demand, some fear.

In PwC and the Urban Land Institute’s recent Emerging Trends Europe report, one pan-European investment manager said: “Portugal is a relatively small country with question marks about liquidity. However, we are looking at a few things because there is a lot more activity than there was, say, two or three years ago. It is a market that we would consider.”


Investment demand in Portugal is now widely diversified and the market dynamics no longer merely appeal solely to opportunistic investors.

“Portugal is generating interest from a quite diverse pool of investors, where you can find investors for core products – an opportunistic and value-add,” says Fernando Ferreira, head of capital markets Portugal at JLL. “Opportunistic investors buying value-add or core-plus are still in the market but it’s not the same as before 2014, when they were the only active players. There’s now scope for core deals to happen with investors with low costs of capital.”

ING’s recent €43.5 million financing of US investor Marathon Asset Management’s debut deal in the market – for a Lisbon office portfolio – highlights the opportunity for core, stabilised property financings.

“Given the quality of the assets and their location in consolidated areas of Lisbon, we have the opinion that the majority of the portfolio is core,” Julián Bravo, head of real estate finance of ING Spain and Portugal, notes about Marathon’s recently financed assets.


Competition for property finance is increasing between local banks, foreign-headquartered lenders such as ING and Crédit Agricole, and domestic banks owned by Spanish groups such as CaixaBank’s Banco BPI and Santander Totta.

Banks operating in Portugal are largely limiting their lending to senior debt, which leaves room for debt funds or more flexible lenders to finance higher-risk deals involving value-add properties, or acquisition of land for developments.

“Local banks are not ready to finance mezzanine loans or riskier assets. These deals are now for investment banks operating from London or debt funds,” a senior banker notes.



Many lenders remain wary of the country, although the market is improving, writes Lauren Parr


The Italian banking system is recovering and the unwinding of banks’ non-core property loan books, estimated at €250 billion by PwC, is high on the government’s agenda. With €29.4 billion of loan sales recorded by Evercore last year, the opportunity to finance investors’ NPL acquisitions is prominent.

There has been a rise in portfolios hitting the market. In February, it was reported in the Italian press that Davidson Kempner had been selected to buy the €250 million Project Borromini from Commerzbank, with Deutsche Bank providing finance and acquiring performing loans.

There has also been an improvement in investment volumes, with CBRE reporting a record €11.4 billion in 2017 – up 20 percent on 2016 – helped by a recovering economy and asset disposals by opportunistic and value-add investors that have brought product up to core quality.

“The logistics sector has been one of the most active, now expanding beyond core locations like Rome and Milan and with yield compression of up to 200 basis points in the last 18 months,” says Andrea Calzavacca, from CBRE Capital Advisors’ Italian team.

Deutsche Bank recently arranged a €404 million agency securitisation of Italian shopping assets for Blackstone. Roman Kogan, head of European commercial real estate at the bank, says much of its activity in the country has focused on stable hotels and shopping centres, although it is receiving more requests for development loans. “Financing opportunities are still very sporadic,” says Kogan.

Cyril Hoyaux, head of debt funds management at AEW Europe, adds: “We’re looking at opportunities one by one and recently entered into the acquisition financing of a well-performing retail outlet in Northern Italy, structured in a very safe fashion, for a global investor.”

Senior debt pricing currently stands at a minimum of 200 basis points for 60 percent to 65 percent loan-to-value, sources say.


Italy faces a general election in March, which presents a risk that populist parties such as the Northern League and the anti-establishment Five Star Movement could perform well. However, while the election could temporarily subdue investment activity, sources said at the time of writing that a populist party victory is unlikely.

Overall, lenders remain prudent in Italy, given the country’s convoluted legal system and moderate growth. A chief concern among those financing NPL portfolios is that the enforcement process remains long and complicated. Despite legislation which has streamlined the process, it is still difficult to calculate the cost of working out assets because the time frame is uncertain.


Foreign investors accounted for more than 75 percent of all transactions last year according to CBRE, with French funds making up a significant portion of capital. Foreign investors also dominate on the NPL side – mainly opportunistic investors, credit hedge funds and international banks as well as pure real estate players.

Certain segments of the market are at a point in the cycle which is attractive to core investors, particularly in Milan. CBRE Global Investors bought a retail and office building in Piazza del Duomo in central Milan last year at a 3 percent yield, financed with 50 percent LTV debt from Natixis and Allianz at a total cost of 2.8 percent.


Italy’s main domestic lenders – UniCredit, Intesa Sanpaolo, Mediobanca, Banco Popolare – are increasingly active, although big-ticket banking deals have been done by French, Dutch and German banks, often in clubs including Italian banks.

Investment banks including Deutsche Bank have been active, supporting private equity clients. In the non-bank sector, insurer Allianz has made inroads, while there is growing appetite from debt funds looking to provide mezzanine.



Interest in the country remains limited, although some are considering the hospitality and NPL markets, writes Alicia Villegas


Domestic banks have limited scope for property lending, meaning some international lenders are seeking opportunities in Greece, particularly in the hospitality sector, says Dimitris Manoussakis, head of Savills in the country.

Greece remains a favourite European holiday destination and lending margins in the hotel development sector can be found in the region of 5 percent, although more established sponsors are able to source debt priced around 3 percent, he explains.

However, much interest in the Greek market is in non-core real estate debt. Opportunistic US private equity funds are circling, Manoussakis says: “There is growing interest for non-performing loans. Greek systemic banks are set to offer better real estate portfolios collateralised by property assets.”

The non-performing loan sales market remains nascent, although Piraeus Bank is currently selling the €1.5 billion Project Amoeba. The Greek NPL market is expected to grow further and will likely become “a focal point for investors in 2018”, investment banking firm Evercore notes in its most recent loan sales report.


The market has shown signs of recovery since early 2017. However, the country’s weak economy and volatile politics still deter all but the bravest foreign investors, notes the latest industry survey from PwC and Urban Land Institute, which puts Athens towards the bottom of the Emerging Trends Europe’s prospects league table.

Greek real estate fundamentals have remained weak since the global financial crisis. According to Bank of Greece research taxes on property, which in many cases were based on administrative and not actual values, as well as ongoing uncertainty regarding the tax framework over the medium and short term, have discouraged demand.

The NPL market, meanwhile, needs “greater transparency and efficiency”, in order to attract investors, says Gifford West, managing director at The Debt Exchange. Another difficulty is that many loans are multi-bank, with each bank having a minority of the interest in the loan, which adds a layer of difficulty for buyers of NPLs, West explains.


Over the past two years, Greece-based real estate investment companies such as Grivalia or NBG Pangaea, have picked up activity, having invested between €250 million and €300 million in commercial real estate assets in that period, Savills’ Manoussakis says.

Meanwhile, opportunistic investors are aiming to pick up the country’s best assets at discounted values. Last year, for example, Henderson Park and Hines bought Athens’s five-star Ledra Hotel for €33 million.

Chinese capital is going into logistics at Piraeus Port, and shopping centres are beginning to attract opportunity funds, the Emerging Trends Europe report notes.


The market remains largely illiquid, with local lenders – led by Piraeus, National, Eurobank and Alpha banks – still holding a portfolio of NPLs exceeding €100 billion.

“Eurobank and the National Bank of Greece are a bit more active. We have seen also that the European Bank for Reconstruction and Development and the European Investment Bank have budgets to back especially development projects,” Manoussakis says.

In December 2017, the EBRD entered a joint venture with Greek real estate developer Dimand for mixed-use developments.