Dedicated providers of the cross-border financing that has helped drive the European property investment boom in recent years say that the level of loans may slow in the second half of the year, but there is no question of the lending tap being turned off completely - barring further seismic shocks in the financial markets. ‘Good quality real estate is unlikely to be affected very much,' said Michiel Rang, CEO of ING Real Estate's international finance
Dedicated providers of the cross-border financing that has helped drive the European property investment boom in recent years say that the level of loans may slow in the second half of the year, but there is no question of the lending tap being turned off completely - barring further seismic shocks in the financial markets. ‘Good quality real estate is unlikely to be affected very much,' said Michiel Rang, CEO of ING Real Estate's international finance
business, in response to the fall-out from the US sub-prime crisis. 'The story may be different though for loans involving C-grade properties in the current high loan-to-value climate.' Loans for the largest real estate deals are financed in one of three ways by the property banks - a single bank assumes the entire burden; syndication, in which a number of banks work together; or through commercial mortgage backed securities (CMBS). In the latter case, banks parcel tranches of loans in the form of securitised bonds to spread the risk. The lending boom in recent years has been driven partially by a strong market - particularly in the UK and US - for CMBS paper, but the credit crisis has cast a shadow on the assets underlying these relatively new financial instruments. Royal Bank of Scotland estimates that the European issuance of CMBS paper shrank to EUR 1.5 bn in July, compared with EUR 14.6 bn in June and EUR 11.3 bn in July last year. And if banks cannot hive off the risk, they may be less keen to loan funds in the first place. 'Clearly there are difficulties in placing some securitised loans on the capital markets at the moment,' said Immo von Homeyer of HSH Nordbank Real Estate, a lender focused on Northern Europe. 'This is quite a new situation. It could be over in a few weeks or it could last longer. We continue to monitor the situation, but we are not changing our strategy because of speculation.' ING Real Estate has a total loan portfolio of almost EUR 26 bn, with EUR 11 bn originating outside its home market in the Netherlands. Europe - excluding the Netherlands - accounts for EUR 8 bn and the rest of the world EUR 3 bn. The bank's gross international loan production for the first half of 2007 was EUR 3.5 bn, compared to EUR 4 bn for all of 2006. Although it has been involved in some CMBS deals, ING Real Estate does not securitise its loans as a matter of course. 'At ING Real Estate we have stayed close to the heart of the matter - property - with an in-depth knowledge of the assets in question.'
Nevertheless, securitisation is part of the maturing real estate world, concedes Rang. 'The CMBS market will be back but to a lesser extent than in the first half of 2007. 'In recent years, the major European banks have expanded more aggressively outside their home markets. Eurohypo - which has grown into a leading specialist in real estate finance and CMBS deals in Europe since it was established in 2002 - reported that its new business in the commercial real estate sector rose by 38% to EUR 23 bn in the first half of 2007. Some EUR 2.8 bn came from the UK, where Eurohypo almost tripled its activities. Germany saw a 45% increase to EUR 6.1 bn. Commenting on potential risks, the bank noted: ‘Well in excess of two-thirds of our lending volume is in investment grade assets, which means that the portfolio quality can be classed as high.' The bank employs a buy-and-manage strategy which entails a mixture of holding entire loans on the balance sheet, securitisation and syndication. In mid August, Neil Lawson-May, Eurohypo's joint head of real estate investment, said the fundamentals of the market are sound, but added that highly leveraged players may face difficulties with refinancing. ‘There's lots more rollercoasters to come from all of this, but not necessarily directly impacting our real estate markets,' he told Reuters. HSH Nordbank Real Estate - with a loan portfolio of EUR 26 bn - has also profited from internationalisation, but competition from foreign banks in Germany has been 'fierce', says Von Homeyer. 'Margins remained under pressure throughout the reporting period, essentially
due to the activities of international competitors, some of whom offer far more aggressive structures and margins.' The capital markets are also growing in importance as a means of off-balance financing. Despite the competition,
HSH Nordbank reported a 'substantial decline in risk provisioning' and an expansion of its new business in the first half of the year to over EUR 7 bn, up from EUR 6.5 bn in the same period the year before. The bulk of the new
loans originated from outside Germany: EUR 2.5 bn in the US; EUR 1.2 bn in the UK; EUR 1 bn in the Nordics and EUR 500 mln in the Netherlands. The bank will decide whether to securitise or syndicate loans on a case-by-case basis, Von Homeyer said.
This article appears in the September edition of PropertyEU Magazine.