European lenders, particularly German banks, have set their sights on the US market in a bid to diversify lending and capture higher margins. Aggressive competition in a highly liquid market, however, stands in the way of their American dreams.
The latest bank trying to profit from the stateside opportunity is MünchenerHyp, following German peers including pbb Deutsche Pfandbriefbank, Aareal, Helaba, DekaBank and LBBW, which have all resumed US lending. Alternative lenders such as AXA Investment Managers – Real Assets and Allianz Real Estate are also active.
MünchenerHyp is aiming to re-enter the US by participating in syndications, as it did prior to the financial crisis. “We want to lend again in the US to diversify geographically and because it’s a well-known market to us. In addition, pricing is still superior to Europe, especially to German or French loans,” says Guido Zeitler, head of international debt investments at MünchenerHyp.
Competition is rife. Life insurers are on track for another historic year of lending in the US. Debt fund dry powder has expanded 26.9 percent to record levels, according to JLL’s Q3 US report. On the other hand, the research notes that traditional debt providers are tightening lending standards and limiting their exposure to construction loans, large single-asset loans and higher-risk assets.
Originations from banks were down in Q3, accounting for 18 percent of loan volumes in the US – well below their 49 percent share in Q3 last year, according to CBRE.
“Banks are still a very important part of the US market but they have dialled lending back due to regulatory concerns. In that respect, this probably creates room for European lenders to be more proactive in this market,” says Brian Stoffers, global president, debt & structured finance at CBRE.
“These European lenders might be most interested in syndications of large transactions or in lending through investments in the CMBS market, as it has become much more attractive,” Stoffers adds.
Year-to-date, CMBS issuance increased to $66.6 billion, well ahead of 2016’s $49.9 billion during the same period, CBRE data show. CMBS originations have been buoyed by stable pricing and availability of capital.
Asked about lending through investments in the CMBS market, Gino Ammirati, vice-president at Brookfield Financial, says: “The US has a very robust market, where lenders can come here and get a decent return for risk in a very liquid security. The CMBS market is absolutely an opportunity.”
At the same time, liquidity in the debt market is leading to lower loan margins. “Over the last 30 days [to mid-November] spreads have tightened by 15 basis points to 20 bps. So, the ability to get wider yields for European lenders may be diminishing,” Stoffers says. “The US market is very liquid at the moment. Insurers can be responsive lenders, with attractive pricing. European lenders need to be agile in order to compete.”
On the other hand, US debt funds, such as those run by Blackstone and Brookfield, could also present a challenge to European debt providers. “With debt funds operating in the US, spreads have tightened precipitously,” Stoffers notes.
Despite this, pricing looks attractive when compared with Europe. “Lenders can still secure an all-in rate of under 4 percent when financing a prime office asset with great occupancy and sponsor, with a conservatively leveraged loan of 60 to 65 percent loan-to-value,” Brookfield’s Ammirati says.