Lending margins edge up across Europe

Average lending margins across European real estate finance markets have increased in the last six months, while leverage has crept up in selected cities, according to new research by Cushman & Wakefield.

The consultancy’s autumn 2017 EMEA Lending Trends report shows that average margins have increased by 18 basis points, to 242 bps, since the previous report, which was published in spring.

For the latest report, Cushman & Wakefield surveyed 30 lenders during the space of one week in mid-September.

The report noted that margin movement varies by market. London experienced a rise of 29 bps to an average of 249 bps, while Paris was up 46 bps to 242 bps and Milan up 67 bps to 293 bps. Frankfurt bucked the trend, reflecting the intense competition faced by lenders in Germany’s core markets; margins in Germany’s financial capital dropped by 31 bps to 195 bps, according to the survey.

Leverage was generally stable, although the report did note an increase in some markets. In London, for instance, average all-property loan-to-value ratios were up from 60 percent to 63 percent during the period. In Paris, LTVs went up from 60 percent to 65 percent.

In general, however, LTVs were stable in most cities, and Cushman reported a slight increase at the European average level, from 60 percent to 61 percent.

Many in the market expect to see interest rates increase, initially in the UK. In total, 85 percent of respondents expect UK interest rates to rise either this year or next. Any rise on the continent is expected to lag that of the UK, where only 56 percent expect a rise by the end of 2018.

“Our latest survey highlights a clear divide in opinion amongst lenders as to whether they believe the market has peaked. Just 17 percent consider that to be the case, with 41 percent expecting a peak in the next 12 months, and a further 31 percent expecting a peak within 24 months,” said Nigel Almond, head of data and analytics at Cushman & Wakefield.

“For many, there remain opportunities for growth in lending – even despite recent evidence that the overall volume of trading in the region has slowed,” Almond added.

Indeed, nearly two-thirds of lenders polled expect their loan books to grow in the coming six months; 62 percent indicated that they expect growth in their portfolios. The growth is likely to come from loan originations, with 34 percent of respondents expecting them to increase. That would represent a rise in origination activity, with 24 percent of respondents having reported growth in originations during the previous six-month period.

Growth in refinancing is also expected, albeit at a slower pace compared with the previous six months. In the latest report, 32 percent expected to see more refinancing, compared with 45 percent in the previous survey.

The UK remains lenders’ primary target, but now attracts a 17 percent market share – only marginally ahead of France, Germany and Benelux markets on a 15 percent share each. The Nordics (11 percent), Spain (11 percent) and Italy (9 percent) also remain popular.

“As we look ahead, lenders expect to see the greatest growth in new lending towards residential and student accommodation, highlighted by 28 percent of respondents, and the logistics sector, named by a quarter,” said James Spencer-Jones, head of EMEA debt and structured finance at Cushman & Wakefield.

“This compared strongly with the more traditional office and retail sectors which accounted for less than a third of responses. The focus on residential and logistics reflects the near-term expectations of greater growth and returns,” added Spencer-Jones.

The responses indicated a strong preference for financing standing investments in tier one, as well as tier two and three, cities. However, the report noted some evidence of a marginal shift towards development activity, primarily pre-let development, due to some investors adopting a build-to-core strategy due to difficulty finding suitable core stock.