European CRE lending estimated at €125bn for 2015 as macro headwinds develop

New commercial real estate lending in Europe rose by almost 39% to €125bn in 2015, according to estimates by Cushman & Wakefield, in a 12 month period which saw financing markets continue to fragment across the lending spectrum in pricing and liquidity as the year drew to a close.

Cushman & Wakefield’s estimates, which include refinancings, are based on the profile of active investors, their historic lending appetites and the European investment markets record €246bn in transaction volumes in 2015. The new lending reflects a 38.8% increase on the revised estimate of €90bn for 2014.

In its survey of more than 60 lenders, which reflected lending in 2015 of more than €80bn, Cushman & Wakefield reports that the lending environment across Europe remains positive with the majority of lenders expecting to maintain or expand their activities in 2016.

Refinancing prospects for the year ahead is currently viewed as stable although the pace of new lending growth is expected to reduce in the first half of this year.

Whole loan finance has risen to the second-most popular type of loan, after senior, accounting for one-fifth of the circa €80bn lending figure deployed by Cushman’s survey respondents last year.

Half of the €80bn lending tally was deployed in the three core markets of UK, France and Germany, although lending in France has slowed, according to Cushman’s survey.

To download the full report, please click here.

Real estate finance market review and outlook

Last year was broadly a year of uneven parts for real estate financing markets, with prevailing macro conditions in the first six months relatively benign before conditions deteriorated a little in the second half of the year.

Increased liquidity following ECB’s Quantitative Easing (QE) programme, announced in January 2015, had a trickle-down effect for real estate markets sustaining a period of relative value for commercial real estate relative to other asset classes.

QE, coupled with other drivers such as low bond yields, supported capital flows into European real estate, asset prices, liquidity and further downward pressure on loan margins which led to new lows for the cycle.

In this early period, the lowest margins were found in Europe’s core cities, led by Paris (138bps), Frankfurt (139bps) and London (157bps), according Cushman’s survey (these margins are all property averages).

In the prime office market, the lowest margin for closed deals last year was around 115 basis points, although there were reports indicative pricing term sheets at as low as 100 bps.

The first macro turbulence in the year was felt in June, as crisis of Greece’s anti-austerity populist government battled against Germany and the European Union over conditions linked to its latest bailout funds.

With fears rising that Greece may exit the EU, which would have crystalised a massive write-off among its creditors and the potential of a ‘contagion effect’ in which the next-weakest EU member state or states, such as Italy or Portugal, comes under scrutiny and markets price in the prospect of further departures.

As the summer rolled on, and then eventual Greece bailout was ultimately agreed, the averted Greek Tragedy gave way in August to a deepening China equity market crisis. In turn this triggered a collapse in commodity prices, as China’s demand sunk.

The ensuing global market turmoil pushed banks into “risk-off” mode causing medium term funding costs to rise across the board, from bilateral lending to spreads on Asset Backed Securities (ABS).

The net effect was uneven across the real estate lending markets.  Bilateral lending markets felt an uptick in senior margins for prime properties of 20 to 30 basis points and felt most acutely in core European cities, such as London.

In capital markets, ABS spread widening evaporated the economics of the current pipeline of CMBS transactions, with margins on warehoused loans suddenly too low for profitable execution. Of the five CMBS which closed in the second half of last year, four are estimated to have booked a loss. 

A number of further transactions planned for the second half of last year were pulled and sold down in the syndication markets instead.

Comparable bilateral deals which closed at around 115 basis points last Spring, were closing with no difficulty but at around 130 to 140bps, which is generally considered to be the current pricing equilibrium for prime London senior loans. This range could perhpas be a new sustainble long term normal.

In the early weeks of 2016, the New Year has presented new challenges and additional uncertainty. It remains difficult to estimate the scale of the impact that the main macro drivers will eventually have on real estate markets in Europe, with key prevailing headwinds moving in opposite directions.

China’s renewed equity market turmoil could impact global growth, while world central banks enter a phase of diverging policy direction: the US Federal Reserve’s move to increase base rates in December has been followed by the Bank of Japan’s surprise to push interest rates into negative territory.

After years of holding rates close to zero, the BoJ stunned markets by introducing sub-zero interest rates, prompting yet more Japanese government bonds to fall to negative yields – meaning investors lose money by holding them.

The BoJ’s move – and the rise of Japan’s negative-yielding bonds – could potentially prompt a flight of capital into UK and Europe, across fixed income and real estate.

The eye-catching news yesterday that Japan Post Bank, the country’s largest financial institution, has launched a multi-billion pound real estate division targeting UK commercial property certainly points to that possibility.

By contrast, the UK’s interest rates are set to remain at their current rock-bottom levels for at least another year, after the Bank of England pushed the prospects of a rise further into the future.

The Financial Times reported this lunchtime that the BoE’s latest forecasts, released on Thursday, effectively endorse market expectations that rates will not increase until the end of 2017.

How much impact central banks’ diverging interest rate paths will have on the relative attractiveness of CRE debt, it is too early to judge given the limited flow of new deals so far this year.

Nigel Almond, head of capital markets research at Cushman& Wakefield, said: “Looking forward the European economy is set to grow further and the prospect of further QE will provide support to occupational markets.

“Whilst growing headwinds create uncertainty, it also provides variability and opportunities across markets for both investors and lenders alike, and expected volume growth of 5-10% in 2016 will support further increases in lending activity.”

About CoStar News

Finance Editor, CoStar News
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