Senior debt market conditions that are mutually favourable to both lenders and borrowers can most often be found in selected central and eastern European cities, research published by CBRE suggests.
Considering projected returns against a range of factors that affect debt terms, Budapest, Bucharest and Warsaw emerge as the ‘friendliest’ cities for lenders and borrowers alike, the consultancy’s inaugural European Debt Map showed.
Milan and Oslo complete the top five European locations in which both sides of the debt equation can find the best overall conditions.
The aim of the data is to provide a comparison of senior debt terms across 20 European cities. The underlying market strength, represented as the projected return each city provides, is set against a variety of metrics which assess the favourability of debt terms.
From a lender perspective, those metrics include debt yield, as well as the property yield minus the total cost of debt. A higher debt yield indicates greater downside protection for the lender. In this analysis, most western European markets have a debt yield in the 6 percent to 7 percent range, with France and Germany each lower at 5 percent. Hungary, Romania and Slovakia have debt yields at or above 9 percent.
From a borrower perspective, the report examines the gap between the cost of debt – expressed as the five-year swap rate, plus margin and arrangement fees – and the property yield. The gap is narrow in the larger western European markets including the UK (1.2 percent) and Germany (1.5 percent). In eastern Europe, Slovakia and Hungary have gaps at 4.1 percent and 2.9 percent, respectively, indicating greater surplus income above the cost of servicing debt.
The results of the analysis offer a simplified picture of borrowing and lending conditions, limited to senior debt, and not taking into account factors including market scale, liquidity and regulatory conditions. Taken at face value, the data would show that lenders find the most favourable conditions in less core markets, although a ‘real world’ analysis would also take into consideration a wider variety of factors.
“Lenders more willing to move beyond core markets will be rewarded with higher returns, as indeed they should be, given the lower liquidity and lack of maturity in many peripheral locations,” explains Marco Rampin, head of debt and structured finance for continental Europe at CBRE.
“Whilst larger, more established markets may seem less appealing, lower returns may be compensated for by scale and perceived security,” he adds.
Nor do the data account for the availability of alternative lenders and structures outside the typical senior debt market. For borrowers, that means although some mature markets covered in the research (for example, London) scored low from a borrower perspective, the deep and liquid real estate lending markets that have emerged in such ‘core’ cities offer alternatives – meaning that, considering the overall picture, they are not necessarily unfavourable places in which to borrow.
With those caveats, CBRE’s findings provide an interesting comparison of senior debt conditions. Exclusively from a lender perspective, London, Dublin and Lisbon are noted as favourable, with each deemed less so for borrowers.
Amenable borrower locations are spread across Europe, including Berlin, Madrid and Amsterdam in western Europe; Helsinki and Stockholm in the Nordics; and Bratislava, Prague and Budapest in central and eastern Europe. Five cities are deemed to be unfavourable to both lenders and borrowers; Paris, Brussels, Copenhagen, Vienna and Zurich.