Debt maturities set to reach peak in 2013, says CBRE

Europe’s commercial real estate sector is facing a major challenge this year, with a staggering €170 bn wall of debt due to mature in the next 12 months.

The lion’s share of these loans is backed by prime good-quality assets which should not encounter any refinancing issues, Natale Giostra, head of CBRE’s debt advisory team in London, said. ‘There is plenty of capital which is looking to lend against prime good-quality properties. But banks’ willingness to roll over loans and extend maturities will largely depend on the individual relationship between the borrower and lender,’ he added.

According to CBRE’s research, just over 20% of the loans outstanding will be problematic to refinance, because they were granted during the boom phase between 2005 and 2007. These loans already had high LTV ratios at the time of issuance and the quality of the real estate is low.

Although prime is still an investor darling, good secondary properties also have a fair amount of liquidity chasing them, largely commercial banks and mainstream lenders. Bad secondary assets have meanwhile become the playground of recently-launched debt funds.

In case of a high loan-to-value and no possibility of a capital injection from the borrower, lenders may opt for a sale of the loan or let it default. The hotel sector in particular is expected to be the most challenged, Giostra said. ‘In order to underwrite a hotel financing, investors need special expertise on the operational side of these assets, and there are few lenders capable and willing to understand how the sector works.’

Geographically, the UK, Germany and France remain the most sought after markets, while lenders continue to avoid weak southern European economies, such as Spain, Italy and Greece. However, with the right asset and at the right pricing and leverage, a deal is still achievable, with Pramerica Real Estate Investors’ €40 mln mezzanine loan to Value Retail in March 2012 for the refinancing of their La Roca Village shopping centre in Barcelona one notable example.

Europe's lending landscape is expected to continue to change throughout 2013, with a further rationalisation on the cards. Difficulties in sourcing deals and achieving targeted returns have prompted a number of new players to exit the market, but overall the volume of lending level has remained stable in the same period, Giostra said: ‘What we saw in the past year and we continue to see is a tendency of increasing margins on all senior financings across the board, especially when provided by commercial banks. On the other hand, debt funds are trying to raise cheaper money and the cost of mezzanine financing is being revised downward.’

Historically, debt funds have provided medium-term financing at an average IRR above 15%, which has gradually decreased to above 10% in the past months. ‘They will end up below 10% by the end of 2013,’ Giostra forecast.

Increasing competition in the high-yield debt fund space is forcing a number of mezzanine providers to move to the lower-yield category, in order to close deals and satisfy investors. ‘New-generation debt funds are looking to raise cheaper capital, to be able to offer more affordable financing and win clients,’ he added. While terms are rarely publicised, CBRE has calculated that the average LTV of mezzanine deals in the past year was 77% while average returns were in the low to mid-teens.