DEBT FINANCE BRIEFING: Alternative lenders stake out new ground

Alternative real estate lenders in Europe are moving into secondary and tertiary locations to offset competition from traditional financiers, Paul Dittmann, head of commercial senior mortgages at M&G Investments, told PropertyEU’s debt finance investment briefing in Frankfurt on Tuesday.

Lending margins for assets in prime locations in the big European cities are becoming ‘really tight’ while loan-to-value rates are increasing, Dittmann told the briefing. ‘Alternative lenders are differentiating themselves by going into the regions, or to places where traditional lenders are over-exposed. We’re also seeing the return of development and spec development financing,’ he added.

As yields on government bonds have plummeted and interest rates remain low, there is still a compelling argument that real estate is a good investment, Dittmann told an audience gathered at the headquarters of UBS in Frankfurt’s Opernturm tower. The other side of the coin is that Central London shops and West End offices are trading at all-time low yields, he said. ‘Yields are starting to look a little toppy in the UK and you could argue the same for Paris and the seven big cities in Germany.’

As a result, a growing number of investors are looking at value-add strategies or assets in periphery markets, Dittmann said. ‘But borrowers are looking for simple structures and some are still wary of securitisation.’

There are exceptions - the syndication of the Squaire in Frankfurt was priced ‘really well’ - but Europe still doesn’t have a deep securitisation market, Dittmann said. Indeed, the market in Europe is not expected to exceed 5% this year. ‘The securitisation market in Europe is still very small. This is partly due to the regulatory environment, not the investor base,’ he added.

While interest rates have come down to around 3-4% for senior loans, to 5-7% for stretched senior debt and 9-12% for mezzanine finance, lenders are still able to get secure covenants, Dittmann argued. ‘The costs for borrower are still low, sometimes as low as 2-2.5% and even sub 1% for the right trophy assets. But we’re not seeing any reckless lending, no crazy LTVs and tight margins like in 2006-07. Debt pricing has held its own.’