Bank lending remains the main source of debt to the real estate industry in Europe, accounting for at least 90% of the corporate real estate debt held relative to other alternative funding sources, new research from Colliers International shows.

Bank lending remains the main source of debt to the real estate industry in Europe, accounting for at least 90% of the corporate real estate debt held relative to other alternative funding sources, new research from Colliers International shows.

The report ‘How long will this property bull market last?’ reveals that the pattern of lending in Europe is shaped almost exclusively by banks, in contrast to the US where a variety of sources including CMBS prevail.

Eurozone banks have been deleveraging at an average rate of €40 bn per quarter between 2009 and 2014, while the UK banks’ outstanding loans have been contracting at £11 bn per quarter over the same period.

However, the increase in lending capacity in North America could improve conditions indirectly by providing leverage for US cross-border investors.

Walter Boettcher, EMEA research director and economist at Colliers, said: ‘The current investment cycle is remarkable because it has been driven primarily by equity. Debt has been the missing ingredient in many markets, due to the prolonged period of deleveraging in response to the credit crisis and subsequent regulatory changes. The availability of debt to allow property investment deals to be leveraged and to develop new assets is a critical to prolong this bull market.’

In North America, CMBS issuance has increased significantly over the last five years from $2.7 bn in 2009 to $94 bn in 2014, highlighting the speed at which lending capacity is increasing in the US. A number of US investors are becoming increasingly engaged in building CMBS capacity in Europe, which could have an impact by providing an alternative to bank-originated debt.

The UK market was the hardest hit post-crisis as foreign banks pulled back, leaving UK-only banks active. Data from the 1990s downturn shows that banks deleveraged for 6.75 years with outstanding amounts to real estate falling from 10.1% of all lending to 4.9%.

In the current cycle, UK banks have been reducing their exposure to commercial property for 5.5 years from 11.6% to 6.9% at the end of Q3 2014. This suggests that there could be another 12 to 18 months to go before exposures begin to increase in the UK, Colliers said.

Damian Harrington, regional director of research for Eastern Europe, said: 'Many countries are still seeing active bank deleveraging, but its impact differs significantly by location which has effectively altered the speed at which individual markets move along the current bull cycle. From a UK and European perspective, deleveraging may have taken time but the worst appears to be over, breathing new life and funds into the lending market.'