How lenders are navigating the late-stage of the cycle

Credit market specialists gathered at EXPO Real in Munich in October. How to deploy debt capital with a downturn looming was a hot topic. Alicia Villegas and Daniel Cunningham were there

Among the packed exhibition halls at the annual EXPO Real trade fair, held in October in Munich, one topic dominated conversation: how to put capital to work in Europe’s late-cycle real estate market?

Those in attendance from the lending side of the industry were perhaps less bullish than a year ago, noting greater risks to financing property nine years into the cycle. Comments including “maybe we need to say ‘no’ more often” were made by lenders at this year’s event, a German banker told Real Estate Capital.

Debt providers, however, remain active across Europe, providing liquidity to support equity flows into the region. Data from Cushman & Wakefield released at the trade show reveal continued strong investment activity: European transactions grew 16.4 percent to $363.1 billion in the 12 months ending June 2018.

Although few dared predict when it will end, the end of the cycle – which several suggested will be a correction rather than a crash – also dominated discussion. “Everyone is aware we are deep into the cycle, but whether we’re at nine o’clock or 12 o’clock is to be determined,” one UK banker said. Assets, many agree, look overvalued, so heat needs to come out of the market. An interest rate rise could be the catalyst, some suggested.

“Research suggests that fewer than 20 percent of loans are on a floating-rate basis and therefore immediately exposed to rate rises. However, the rest of the market, particularly those with imminent maturities, may find they need to refinance in a higher-interest-rate environment. Real estate yields have compressed to such a degree over recent years, that even relatively minor rate increases are likely to impact materially on ICR levels and consequently investor returns,” said Bill Sexton, senior managing director for the EMEA region at servicer Trimont.

Meanwhile, rate increases in the US have pushed some Asian players into Europe – including debt opportunities. Hanno Kowalski, managing director of FAP Invest, the Berlin-based financial advisor which recently launched a €250 million Germany-focused mezzanine debt fund, said he has been approached by players from Japan and South Korea, keen to participate in future deals as senior debt providers for whole loan opportunities.


As investors aim to create robust portfolios, competition for core property has intensified. As a result, senior loan margins against prime assets across Europe have tightened further in mature real estate markets. “The pricing trend in Germany is unfortunately only one way – going down,” a senior executive from a German bank said. Competition is fierce, with margins for prime product being quoted at 55 to 65 basis points on a 50 percent loan-to-value facility. However, the fact the leverage is so low, compared with 70 to 80 percent in the last cycle, gives German bankers comfort.

“Real estate is one of the best-running businesses for German banks,” said Oliver Sill, director at BayernLB. “Banks face several pressures today; competition from fintech, as for example seen in Wirecard, a tech firm, recently replacing Commerzbank in the DAX; there is a strong competition, pressure on margins and they are losing credit exposure as companies source money through the capital markets; banks also face pressure on costs due to factors such as regulation. However, real estate business is still running well, because the interest rate environment drives a lot of money into the sector and our clients still focus on one of our core products – loans.”

Now more than ever, senior lenders want to back investors in the most stable and liquid economies but, as the cycle approaches its end, they need to compete either through pricing or by edging up the risk curve. More development financing is now being targeted, with senior debt providers chasing prime, pre-let schemes backed by sponsors with a well-known track record. AEW and Ostrum Asset Management, formerly known as Natixis Asset Management, for instance, have recently provided finance in two separate club deals to back two office projects in Paris, both being priced at circa 300bps. This compares with senior margins for investment loans in the core space, which stand at 90bps, down by 10bps year-on-year.

Opportunities in the value-add space are increasingly being chased across Europe’s core cities. Régis Aubert, senior banker at France’s Crédit Agricole, noted the bank seeks value-add assets in its domestic market – and other key markets where the lender has real estate teams on the ground, such as Madrid or Milan – to support sponsors with a strong track record and capture higher margins.

Competition for financing these assets, however, has increased. “Two years ago, value-add office assets were typically priced well above 200bps; whereas now pricing is often below that mark. Pricing for these assets in the central business district of Paris can sometimes get closer to 150bps,” Aubert commented.

Another strategy is to expand lending to less mature real estate markets, which offer a margin premium in comparison with more established countries. Some lenders are doing business by financing stabilised assets in countries such as Spain, Italy or Poland, where transactions in the core space can offer margins of 150bps to 170bps for a 60 percent LTV facility, said AEW’s Cyril Hoyaux.

The renewed faith in Italy’s property market, however, is being increasingly questioned after the formation of the coalition government between the anti-establishment Five Star Movement and the far-right League in June. As the country embraces populist politics, many lenders are in a “wait-and-see” mode, several players said.

In Poland, on the other hand, international lenders, mainly German, are “hungry” to finance core deals in the senior space, offering a margin that ranges from 1.5 percent to 2 percent, says Hubert Manturzyk, CBRE’s head of debt and structured finance in Poland.

Christof Winkelmann, management board member at Aareal Bank, for his part, highlighted the opportunity to finance large portfolios, to provide diversification across European markets. The German bank recently provided US private equity firm Apollo Global Management with a five-year debt facility of up to €800 million to finance a pan-European portfolio of logistics properties.

“This type of deal is attractive for us and the borrower, because it addresses a number of properties across countries in Europe within one facility. It provides for less uncertainty and complexity, while making it a bankable product for accessing the syndication market post-closing,” Winkelmann said, adding that the bank expects to syndicate a portion “north of a three-digit figure” soon.


Politics was also a topic of conversation. With just five months until the UK leaves the European Union, German banks are preparing to lend through a hard Brexit.

“Even if the economy dips, the UK is one of the strongest in the Western world and it will come out of it, but we are looking at how fast the UK could agree bilateral trade deals. We have checked the UK portfolio and are going deep into the sectors. In terms of post-Brexit financial regulation, Deutsche Hypo has been in regular contact with the authorities. It has always been our aim to proactively manage the potential outcomes and scenarios under Brexit to maintain the Bank’s exposure to its UK commercial real estate business,” said Sabine Barthauer, member of the board of managing directors at Deutsche Hypo.

Chris Bennett, DekaBank’s new branch head in London, on the other hand, said the German bank remains “very active” in the UK market, noting that Brexit uncertainty is not dictating lending activity, as there is debt liquidity in a market with diversified players. Bennett said the bank is continuing to target the core space, highlighting the opportunities arising from Asian investors buying assets in London.

A UK-based banker, however, noted there are fewer deals in the UK. “Investors are saying they can’t avoid the ‘B’ word. Everyone is looking to where they think will be least affected; PRS, logistics, light industrial.”

Europe still has a functioning property lending market, despite its hurdles. As global capital providers continue demanding European real estate, the challenge for lenders is to source the right deals while avoiding the end-of-cycle risks.