Syndicated real estate lending slid 15 percent during 2017, according to figures published this month by data provider Dealogic. This was not as sharp a drop as 2016 – when volumes fell 40 percent year-on-year – but it hints that life is not getting easier for those tasked with distributing property loans.
Bankers Real Estate Capital spoke to insist the syndication market performed satisfactorily last year. The reason for reduced volumes, they argue, is simple; there were fewer big deals in the market. A pick-up in larger loan deals in the latter part of 2017 will fuel syndication activity in the first part of this year, they add.
We think there are, however, several other factors behind the fall in volumes.
It became evident throughout 2017 that more investments were funded through equity, with a limited degree of leverage applied, curtailing the need for lenders to share debt deals among themselves.
Another crucial factor is the greater volume of loan repayments European banks are facing. To bolster balance sheets, commercial banks have been holding larger volumes of the loans they write, with less being sold down.
A German banker told us that lenders, especially his country’s banks, are trying to hold as much as possible. Syndication, the banker went on, is used for risk management reasons; the business model of originate-to-distribute is very limited these days.
This phase of loan repayments will continue in 2018. CBRE research compiled at the end of 2016 indicates that around €130 billion of property debt is due to mature this year in Europe, encouraging lenders to protect the size of their loan books. Indeed, many banks are still trying to grow their portfolios against the backdrop of a market in which prime lending deals are harder to come by.
In Germany, for instance, there was continued growth in new business, albeit slowing year-by-year. The German Debt Project report published last June by the University of Regensburg showed 2016’s 10 percent growth was half of 2015’s, with 2017 expected to drop again to 5 percent. When most banks are trying to grow their real estate finance balance sheets, they cannot syndicate large volumes of transactions.
Further, the squeeze in margins across Europe has deterred some alternative lenders seeking higher pricing from buying into deals. Pricing in France or Germany is now often a double-digit figure on low leveraged prime assets, one UK syndication banker told us. In London prime, margins have come down below 150 basis points, while for the same type of properties elsewhere, they are between 100bps and 150bps.
One group of lenders which has seemingly managed to keep syndicating a large proportion of what they write is the investment banks. One that Real Estate Capital spoke to described syndicating around two-thirds of its originated volumes last year. Such lenders operate an originate-to-distribute model and typically write higher-margin business than commercial banks which appeals to a broad spectrum of buyers.
Europe still has a functioning syndication market, despite its challenges, and most say they managed to syndicate what they needed to last year. CMBS pricing has come in, meaning that investment banks are likely to securitise a greater proportion of their underwriting this year.
There is still strong buyer demand for syndicated debt and European bankers can efficiently distribute their loans. But with the increased challenge of sourcing suitable big-ticket deals, the need to build portfolios and the return of a viable CMBS market, syndication could become rarer still.
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