European lenders expect loan margins to continue to fall in the next six months according to new research by DTZ.
Almost half (42%) of 57 lenders quizzed for the firm’s first bi-annual European Lending Trends said they are already typically lending on prime deals at sub-200 basis points margins with 71% lending at under 300bps. “Even at those levels the expectation is for margins to fall further over the next six months”, the survey said.
Margins on prime real estate were expected to decrease further by 29 of the respondents in the next six months while 25 said they expected them to stabilise. Only one lender expected margins to increase.
But lenders don’t intend to seek higher returns through increasing risk in terms of loan-to-value ratios. The majority of prime loans are leveraged up to 70%, and, for secondary lending, 60% of debt providers don’t lend higher than 60% LTV.
“Margins have been coming down with LTVs at 60-70%”says Edward Daubeney, head of debt advisory EMEA at DTZ. “We expected there to be a floor for margins, particularly in the UK, but that lenders would increase LTVs, moving up the risk curve and increase margins as a result,”
“The feedback we’ve had however says that LTVs will remain the same but banks are prepared to allow margins to come down even further, which has surprised us.”
Deal flow has improved markedly since the start of the year and the market is expected to pick up further in the next six months as investors continue to pile into the property sector. A majority of those surveyed said they had increased loan originations in the last six months.
Three-quarters of lending activity is focused on €50m-€150m loans reflecting the pick-up in investment activity for €100m-€200m deals and also an opportunity for new, non-bank lenders targeting slightly smaller tickets.
Senior lending was by far the most popular type of activity undertaken by the organisations questioned although 32% were willing to issue whole loans or stretch senior in order to secure deals with the intention of syndicating junior or senior pieces.
“Investment banks are going to higher LTVs of say 80%, deciding to keep the senior and then selling on the junior. On the flip side, mezz lenders are underwriting whole loans, retaining the mezzanine and syndicating the senior,” Daubeney says.
Of the 27% of respondents that were issuing debt with a strategy that would not see them retain it in full, 75% were looking to syndicate in a traditional manner, 12.5% looking to do so in order to issue CMBS and a further 12.5% in order to sell on through private placement.
Geographically the UK was the most popular market for lending with 80.7% of lenders lending in the country. Recovering and less mature markets also featured notably with 19.3% saying they would lend in Spain, a similar percentage willing to lend in central and Eastern Europe, 17.5% in Italy and 3.5% in the Baltics (see chart. There was more lending interest in the Benelux markets relative to recent volumes while volume growth was weak in the Nordics. “And with a number of Italian banks struggling in the wake of the recent asset quality review, there are opportunities for overseas lenders in this recovering market”, the report says.
New originations had increased for 76.8% of the lenders surveyed over the previous six months and a majority, although not as many, expected the next six months to be better than the proceeding period – 62.5%.
Nigel Almond, head of capital markets research at DTZ said: “When we look at the investment market overall it is still very strong and we expect an increase in investment volumes across Europe by 20% this year. Diversity could be a factor though, which is a healthy thing, with the market not now just dominated by banks,” he says.