REC Germany Forum: Borrowers remain reserved on leverage

A panel consisting of heads of financing from LaSalle Investment Management, Commerz Real, M7 Real Estate and IVG Immobilien agreed that borrowers are not generally requesting that lenders increase loan-to-value ratios in deals.

Panelists in Frankfurt say margins are tight but LTVs are stable

European real estate borrowers are taking a conservative approach to leverage, panellists at Real Estate Capital’s Germany Forum said this morning.

A panel consisting of heads of financing from LaSalle Investment Management, Commerz Real, M7 Real Estate and IVG Immobilien agreed that borrowers are not generally requesting that lenders increase loan-to-value ratios in deals.

“At higher leverage, the cost of debt become more expensive, so why pay to a mezzanine lender what you can pay yourself?” said M7 Real Estate’s Hugh Fraser. “We don’t go above 60-65 percent LTV. If there’s a blip and capital values were to fall, our view is that we have the income to protect ourselves.”

Ca6xQXBW0AADXJ1Roberto Carrera, European head of financing at LaSalle added that borrowers’ cautious approach is not the result of a lack of available higher LTV debt:

“It is refreshing to see a variety of debt offerings, including traditional bank debt, insurance company debt and senior and junior finance from debt funds. It depends on the investment strategy; for opportunistic purchases, mezzanine can be appropriate.

“There is demand for that type of leverage in Europe and it is good to have that diversity of lenders.”

A poll of borrowers among the conference attendees showed that 58.3 percent had closed a deal with a debt fund.

Fabian John, head of corporate finance at IVG Immobilien added that despite the growth in the number of alternative lenders since 2009, Pfandbrief banks and Landesbanks remain dominant in the German market due to their lower costs of funding and subsequent “aggressive pricing”.

Panelists also discussed the ongoing level of competition between lenders, particularly in the German market.

“There is very fierce competition among German lenders and pricing is also coming down in France, although it is not at German pricing levels yet,” said LaSalle’s Carrera.

Barkha Mehmedagic, head of group finance and treasury at Commerz Real, added: “Traditional German banks are sticking to their risk policies. There is lots of competition in pricing and we don’t see them changing their covenants.”

Panelists emphasised the continuing importance of relationship banking balanced with the need to diversify lending sources.

In response to a poll conducted during the morning session, 56.3 percent of borrower delegates said that price was the key criteria to choosing a lender, followed by expertise at 18.8 percent and relationship at 12.5 percent. Only 6.3 percent selected the speed of the transaction.

Expressing surprise at the survey result, conference chair Alexander Fischbaum of AF Advisory said: “It is not always the cheapest loan that wins. Flexibility, speed and reliability are important to most of my clients. In my experience, pricing is an issue but not the only issue.”

Fischbaum confirmed though that margin pressure is very high in the German market, referring to one of his deals where five lenders are currently quoting terms at margins of 80 bps and below.

Earlier in the day, Thomas Staats, head of origination, international property finance at Deutsche Hypo spoke to Real Estate Capital senior editor Andy Thomson during today’s keynote interview.

Asked about increasing regulation of the banking sector including the proposed Basel IV capital requirements, Staats said that pricing will inevitably be impacted.

“We will all need more capital to cover requirements. The trend is that customers will need to be prepared to pay more, not immediately, but in the longer-term. The burden of increased regulation needs to be paid for,” said Staats.