Evidence of the recovery of property debt markets is becoming increasingly plentiful. In the US, competition to lend to good-quality sponsors and assets is fierce and the number of conduit lenders to CMBS has shot up; recent estimates count at least 35. It’s the same story in Europe, where markets that were moribund early last year, such as Spain and Italy, are now attracting more investors. They are being followed in by (mainly) international banks, although one by one, domestic lenders are also able to press the re-set button and restart selective lending.
The latest De Montfort lending report, the UK commercial real estate debt bible, finds that more finance is available, there is a greater diversity of lenders and the debt mountain accumulated in the past boom is now £72bn lower. Laxfield Capital’s ‘Debt barometer’ finds that the proportion of new acquisition loans relative to refinancings is increasing. Borrowers now have a choice of lender “at every part of the risk-reward spectrum and across all asset classes”, said one broker.
It’s ironic, then, that no sooner are the debt markets beginning to recover than we are fretting about a bust all over again. Ironic but not surprising, after the trauma of the debt-fuelled property crash and its painful aftermath. Part of the nervousness is the speed of the recovery, which somehow feels unsettling. Loan margins, for example, have “never reeled in so fast”, as a senior Lloyds banker noted at a recent real estate event. It’s not just happening in the UK, France and Germany, either; Italy has just seen banks fight to lend at not much more than 200bps, although at low leverage on a super-prime transaction.
Partly the fretting is by those who got it wrong last time not wanting to be caught out again. This is possibly why the rating agencies’ views of the metrics of US conduit loans differ so markedly from those of the banks making the loans. The rating agencies no doubt have a point – underwriting standards do seem to be laxer and interest-only, high LTV loans are creeping back, although the agencies are still rating this debt.
And then there is an understandable feeling in some quarters that ‘something must be done’ to stop too much, too-cheap debt from feeding another boom and amplifying a bust. This sentiment lies behind the Vision for Real Estate Finance in the UK report, published in its final form last month. It has some valuable things to say. A long-term measure of value for bank lending is a realistic recommendation, said valuation experts at the report launch, though lenders would have to agree to use it and live by it.
A mandated central database of all property loans is more problematic and needs much more thought than is in the report. And if it’s true, as UK banks are complaining, that slotting is having the perverse effect of discouraging safe lending, then its implementation should be speedily reviewed. Real Estate Capital will continue to analyse and report on these and other trends via this, our bigger, relaunched magazine, and on a brand new website that will include all our content and breaking news. Our remit is broadening to include US and more European coverage. We hope you will find the changes useful and thought-provoking.