Editor's Choice: Debt investors seek greener pastures down south

Property financiers are increasingly heading south in search of higher returns as a sharp rise in non-bank lenders squeezes interest rate margins in the UK and Germany.

An ‘unprecedented’ number of new lenders has entered the UK property financing market in the last 12 months, of which over half are non-bank institutions. Real estate adviser Savills has identified 52 new entrants to the UK lending market, taking its list of organisations with ambitions to lend to over 200 names.

This influx of new players has led to a growing mismatch between opportunities in the market and lender ambitions. Whereas the opportunities for lending currently stand at £40 bn, Savills says that lender ambitions are far greater at £75 bn. In the UK, the funding gap has turned into a financing surplus.

In Europe, non-bank lending grew by 46% last year to account for a total amount outstanding of €50 bn and growth is expected to continue into 2014. This follows an 80% increase in 2012, according to DTZ’s latest Money Into Property report.

The increased competition is driving interest rate margins down and LTV ratios up. At the same time, it is also pushing lenders towards riskier products and new markets. Financiers are becoming less cautious about speculative development and many are now willing to lend against secondary assets. While there is still some reluctance among lenders to move into more peripheral markets, it looks like this is gradually disappearing.

Delphine Benchetrit, partner at Finae Advisors, notes that a lot of new lenders are moving from the UK to France, including major groups such as M&G and GE. 'US banks are becoming more active in the mezzanine and junior debt segment of the market in France, providing LTVs of up to 80%, with a view to syndicating the debt to other holders. Debt funds are active as well.'

Iberian influx
Similar moves are being observed in Spain and Italy. At a recent PropertyEU Investment Briefing, a number of alternative lenders and debt servicers including Situs as well as banks such as Aareal announced they were opening an office or reopening their business in Spain. Earlier this week, the Iberian peninsula reported the largest loan trade in years with the acquisition by Lone Star and JP Morgan of the Commerzbank portfolio. Germany’s second biggest lender sold its Spanish commercial real estate financing portfolio, as well as a portfolio of non-performing loans in Portugal, for €4.4 bn. The deal underscores the extent of the investor appetite for such products – even for big-ticket transactions.

In Italy, asset manager Hines Italia sgr has received over €3 bn of debt offers for its Porta Nuova Garibaldi fund, focusing on the development of a 254,000 m2 mixed-use project in central Milan. As such, the €450 mln auction for the refinancing of the Garibaldi section of Porta Nuova was seven times oversubscribed.

This is a far cry from five or six years ago, when at the peak of the eurozone crisis Italy was so out of favour that hardly any investor dared venture there. In July 2009 for instance, the refinancing of prime Milan retail units with a loan to value (LTV) at 60% and priced at a 9% coupon failed to attract institutional capital, according to data provided by First Growth Real Estate.

As the financing market opens up, securitisation is also making a comeback. German lender Deutsche Bank is currently looking to place €355 mln of commercial mortgage-backed securities backed by three loans linked to 17 properties largely in Northern Italy. According to those who track the market, the CMBS would be the first to be backed by multiple loans in Europe since the financial crisis. The offering comes just months after Goldman Sachs securitised €363 mln of debt last December secured against mainly secondary retail assets leased to Auchan. The financing – to fund Morgan Stanley’s acquisition of Auchan's Italian portfolio - was priced at around 525 basis points for a 60% LTV.

Renewed appeal
This level of pricing explains Southern Europe's rediscovered appeal, which lies in its attractive risk-adjusted returns compared to what is available in the crowded and sophisticated UK and German markets.

Generally, for good quality non-prime secondary commercial properties in Italy for a debt quantum above €50 mln, experts say that around 60% LTV senior loans can achieve a 350-600 basis point margin. This compares with a 175-300 basis point margin for an equivalent loan in the UK and 150-250 basis points in Germany.

The difference in margins for mezzanine or subordinated loans is even higher, ranging from 10% to 15%. According to Francesca Galante and Cyril de Romance, co-founders of First Growth Real Estate, there is virtually no mezzanine market outside of the UK and Germany, giving investors in peripheral Europe a first-mover's advantage.

In a fixed-income world where it is difficult to achieve double-digit yields, real estate subordinated debt on the continent - on a risk-adjusted return basis - is an interesting space to be in.

Virna Asara
Southern Europe Correspondent

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