With economic uncertainty abounding and the spectre of regulation looming, lending will remain tight since large banks are under pressure to get their houses in order now. Claus-Jürgen Cohausz talks to Lynn Strongin Dodds

The major themes that played out in 2010 are likely to continue in 2011, according to Claus-Jürgen Cohausz, member of the managing board and chief origination officer of WestImmo, one of Germany's leading providers of real estate financing. Strict lending criteria coupled with economic uncertainty and the threat of regulation will keep banks focused on core, high-quality real estate.

Cohausz says: "Most of the real estate markets are improving and many of the banks, in principle, are in better shape than two years ago. However, I do not see any increased appetite for risk. For example, they are only interested in high-quality properties in prime locations, such as London, but not in secondary markets such as in Birmingham. Loan to value (LTV) ratios remain at 60-65% except for extremely stabilised, well-located properties with strong, long-term tenants. In these cases we could see LTVs of 75%. I also expect margins across Europe to remain high - between 150-300bps - depending on the types of assets. If competition increases on the plain vanilla deals, margins could slip but they will not fall back to the below 100bps level that we saw in previous years."

Cohausz believes that global economic uncertainty and regulations such as Basel III are and will continue to be two of the major factors weighing down the lending landscape. Although there is a long lead time for implementing the key provisions - up until 2019 - banks are under pressure to get their houses in order now. This explains why German banks, one of the major sources of funding over the past two to three years - have scaled down their activities. The new rules not only make it less capital efficient to lend to property but harder for German banks to use the Pfandbrief market to fund property lending.

Under the rules, the basic level common equity tier-1 ratio, the core measure used in the regulations, will rise from 2% to 7%. This includes a 2.5% "conservation buffer" which banks would be required to hold as a cushion against a financial crisis.

The gap left by the German and other banks is expected to be filled in varying degrees by other institutions, as well as alternative sources. BNP -Paribas, for example, is making a push into the UK to take advantage of the dearth of property lenders in the country.

The French bank's first venture was part of a syndicate that included the lead bank Société Générale as well as Crédit Agricole and ING Bank. They provided finance for private equity group Carlyle's £670m (€794m) purchase of a portfolio of London offices previously part of Simon Halabi's White Tower portfolio.

However, Cohausz does not see larger underwritings as a trend in the near future. "It depends on the size of the bank and the property but many of these transactions are complicated and complex. I think it will only be the larger banks that have the capacity to underwrite these types of deals."

Insurance companies are also expected to become more involved thanks to Solvency II, while mezzanine firms have been busy raising funds. Cohausz notes: "The banks are still the main players but we are seeing mezzanine finance being provided by specialist firms. One of the biggest problems, though, with mezzanine is that margins at 600-800bps are too expensive. I think the market needs to find a better balance, but once prices fall, I expect that there will be more activity."

As for the bond markets, Cohausz does not foresee corporate bonds or commercial mortgage-backed securities being a major feature in the -coming months. "There were not that many corporate bond deals this past year and the ones that we did see were typically only from well-capitalised stock exchange listed companies that were well placed to issue bonds. They are not a valid option in Germany but we have seen some transactions in the UK."

Although the US commercial mortgage-backed securities market has revived, Cohausz believes activity will remain muted in Europe. "The European market is much smaller and less developed than the US market," he says. "The deals that we have seen have not been typical of past transactions in that they are low-leveraged private placements sold to a single investor. I do not expect that to change this year, as there is very little interest in subordinated debt."