Margins are improving and volumes are increasing but banks remain highly selective as they work through legacy issues. Lynn Strongin Dodds reports
The fragility of the economic recovery is uppermost in bankers' minds which is why caution and selectivity remain the watchwords. German banks continue to be the dominant players but only for prime properties. Max Sinclair, head of the UK division of Eurohypo, confirms that "it is mostly the German banks that are active and interested in the prime segment of the market. Loan sizes are typically no more than £60m-75m (€75-90m) and LTVs around 65%."
Simon Mallinson, director of European research at Invesco Real Estate, is beginning to "see LTVs rise in the UK, Germany and France to 70-75% although it is largely in prime assets. LTVs are still around 60% in Spain from a low point of 40-50%. There is also a stabilisation in margins in Europe at 125-150bps above Euribor. The banks in the UK and France are charging margins of 125bps which is down from a respective 200bps and 185bps late last year. Spain has also come down to 180bps from 250bps at the start of the year. Although margins have improved, they are still about 50-75bps higher than they were three to four years ago. With non-prime assets LTVs are 85% and margins as high as 400-500bps."
Adrian Heft, treasurer of Hendersons property department, says "margins have come down significantly from their peak. This is a reflection of the competition in the market as investors are generally only looking at the right type of deals - core and core plus: they want long leases, quality tenants and trouble-free buildings."
Ben Stirling, managing director, continental European real estate at Aviva Investors, says: "There has been a reduction in margins and more banks are prepared to lend, but it is still difficult to get financing for new facilities. I think this is because the banks are still working on their legacy portfolios and have a limited capacity for lending and the banks remain risk averse."
Tony Smedley, head of European Funds at Invista, says: "We are mainly seeing senior debt as well as private equity style financing which might be put in as part of a tranche or as joint venture equity for work-outs. We have not seen that much true mezzanine, not least because it is now perceived as equity and thus very expensive".
A recent report from real estate adviser DTZ shows that property opportunity funds and other vehicles have been raising large volumes of equity since the second half of 2009 to take advantage of low-priced assets. There is around €116bn of new equity looking to take advantage of funding shortfalls and acquisition opportunities.
There is hope for further loosening although views are tempered by the economic uncertainty as well as the impact of the Basel III capital adequacy requirements. Transaction volumes are definitely increasing with direct commercial real estate investment in Europe totalling €23bn in the second quarter, up 15% on the first quarter's figures of €20bn and an 80% jump on 2009, according to Jones Lang LaSalle. However, on a half-year basis, 2010 European transaction volumes remained stable at €43bn compared with the same period last year.
JLL estimates that in the second half of 2010 volumes will increase by 35% and reach the €100bn mark at year end. The UK has led the recovery of both transaction volumes and the pricing correction among prime assets, and accounted for 40% of the overall European activity. Volumes increased by 30% over the quarter, coming in at €9bn in the three months to June.
There has been an increased focus on France, Germany and the Nordics, but again the attention is on acquiring larger assets within the core and core-plus segments. Germany ratcheted €4bn of transactions in the second quarter followed by France at €2bn and Sweden at €1.4bn.
The outlook for financing also looks promising based on DTZ figures that show two-thirds of lenders are expecting to increase gross new lending in 2010 and 2011. But some market participants are circumspect. Smedley says: "It is also unclear what the impact of Basel III will be."
Although the Basel requirements are not as strict as feared, the full picture will not be known until later in the year when the Basel Committee publishes a figure for a higher Tier 1 capital ratio and details of how long banks have to remove lower-quality capital from their capital calculations.