Alternative lenders will source 25% of market by 2017: AEW Europe

A quarter of all European senior commercial real estate mortgage loans, or an estimated EUR 33 bn per annum could be sourced from insurers, pension funds and specialist loan funds within the next five years, pan-European real estate investment manager AEW Europe estimates.

'Based on the experience in the US, which saw institutions stepping into the market on a large scale in the 1990s, I wouldn’t be surprised to see around 25% of all senior loans coming from these sources in the next five years,' said Mahdi Mokrane, head of Research & Strategy for AEW Europe.

Mokrane conservatively estimated that there are now per year around EUR 100 bn of senior loans of high-end quality commercial real estate assets originated in Europe secured by good tenant covenants, way below the EUR 250 bn seen at the peak of the investment market in 2007. Assuming tepid European economic growth, senior lending may rise to about EUR 130 bn by 2017, of which insurers, pension funds, and others could readily absorb 25% or EUR 33 bn.

Institutional investors are being attracted by the 4% plus net yield achievable on senior real estate loans that are backed by prime core assets with high credit-worthy tenants, which is comparable to very senior corporate bonds yielding 2.4% and 0.8% for a blend of UK, French, German five-year government bonds (i.e. core Europe sovereign debt).

To achieve roughly the same yields as senior real estate loans, investors would need to target European small company lending at a much higher level of risk.

With the availability of high quality product becoming constrained by a lack of development - which should underpin rental levels and widen even further the yield spread with secondary assets - peripheral core areas could begin to offer very attractive investment opportunities, AEW said. The report cities the Thames Valley to the west of London and Paris’ western business district (WBD) as two examples.

AEW Europe expects quality distressed assets to start to emerge from these sub-markets due to a combination of factors such as a limited availability of debt for property finance in the Thames Valley and significant levels of existing leverage in parts of Paris, notably in La Défense. However, these areas also have strong underlying fundamentals, which should reassert themselves with compressing yields from 2014 onwards once the mid-term 'market-clearing' phase is mostly completed.