Lending terms: Debt costs stabilise in Q1 amid refinancing challenge

In the first quarter of 2023, loan-to-value ratios in European markets decreased, while the total cost of debt for prime real estate remained stable, continuing a trend observed in the previous quarter of 2022.

While loan-to-value ratios declined in European markets during Q1 2023, there was a stabilisation in the total cost of debt for prime real estate – a continuation of the trend evident in the last quarter of 2022, according to property consultant CBRE’s latest Debt Review report.

LTV ratios for new senior loans were notably lower than 12 months ago, says Chris Gow, CBRE’s head of debt and structured finance, UK & Ireland, with senior lenders seeking to “be mindful” of maintaining interest cover on new loans at an acceptable level – a trend seen across European markets. The total cost of debt for senior lending has increased by 200-300 basis points year-on-year, says CBRE. However, while short-term interest rates have continued to rise, long-term rates moderated during Q1, and were slightly lower during this period compared with Q2 2022.

Margins increasing

Lenders have also reassessed margins, with the average margin for senior loans on prime property assets having increased by 20-30bps in all sectors since March 2022, the property adviser reports. Margins for prime multifamily residential assets are the lowest across the sectors, while retail has the highest.

For these reasons, borrowers looking to refinance have faced a refinancing gap for new loans, CBRE says. Unable to replace existing loans with like-for-like debt, borrowers have had to choose between injecting more equity or obtaining subordinate debt to cover shortfalls.

Despite this, says Gow, lenders have been working with borrowers to find solutions.

“Recently, we have seen good offers being made at loan maturity, as well as the use of trapped cash from the existing loan to reduce the LTV required at extension or provide interest reserves, which in turn can improve the terms on which a new loan is offered.”