The European real estate debt market will continue to tighten over 2011, as lenders exercise caution and become even more selective in who they lend to, driven by a combination of both long- and short-term factors, according to CB Richard Ellis' (CBRE) latest European Capital Markets report.
Over the longer term, the availability of debt will be constricted by regulatory changes, with Basel III seeing lenders (with the exception of insurance companies) increase the amount of capital they must retain on their balance sheets. In the short term, the debt supply will be further restricted by the withdrawal of some lenders from the market. For example, since the onset of the downturn, almost 40 lenders have withdrawn from the UK market and the recent announcements from prominent lenders in the market would indicate that this situation is unlikely to change in the near future.
Over the course of 2010, the European debt market witnessed a significant change in sentiment, which transitioned through three distinct phases. In the earlier part of the year, the market witnessed a notable easing in lending terms on offer, with a general increase in loan sizes and LTVs granted. Phase two, in late spring, saw divisions created across Europe as the sovereign debt crisis spiraled.
In Spain, for example, with concerns over the economy and sovereign debt downgrade, lending terms shifted significantly, even for top quality assets. Over the summer maximum loan size fell from 50 million to 35 million, while margins increased to 275 basis points (bps). In contrast, key Western European markets, particularly Germany and France, experienced growing competition among the banks to lend against prime assets, which resulted in further easing of lending terms on offer.
The final few months of 2010 saw further changes. Lending activity tightened across all geographies, both in terms of the number of active lenders and the terms available. This is already evident in the more stringent terms on offer across all countries, and particularly in the recent increases in margin requirements - even in the UK, where these have been declining since mid-2009.
Commenting, Natale Giostra, Head of UK & EMEA Debt Advisory at CBRE Real Estate Finance, said: "The withdrawal of lenders from the market either from international activity or real estate altogether continues to take its toll. Coupled with the challenge of a huge refinancing wall of over 500 billion in Europe over the next three years, it is unlikely that new lending activity can truly re-start as in the near term attention will be focused on delivering solutions to legacy problems. With interest rates also expected to increase, we expect to see European lenders become even more selective in 2011, with terms becoming more restrictive, which in turn will place further upward pressure on margins."