European real estate transactions have dropped by 61% year-on-year and the €2tn commercial real estate debt market is running at a sluggish pace when it comes to loan refinancing.
Against this backdrop of subdued lending activity, accompanied by elevated loan costs, academics at Bayes Business School (formerly Cass) are warning of more distress to come due to the longer-term debt maturities in the European market.
The Bayes European Commercial Real Estate Lending Report, published today, says 2023 is proving to be one of the most difficult years for financing real estate post the global financial crisis in 2008/09.
Some large transactions highlight the “diligent efforts” of the banks to provide solutions, it says. Recent examples include the €600m loan to refinance the Eindhoven High Tech Campus in the Netherlands, and Oaktree’s distressed €99.6m of mezzanine debt at 6% for the approximately €700m purchase of the Highlight Towers in Munich. However, the report says these high-profile deals tend to overshadow the difficulties for the small to medium-sized investment market.
Nicole Lux, lead author and senior research fellow at Bayes, said securing financing was particularly arduous for investors dealing with mid-size assets, secondary cities or locations and development projects. This challenge is exacerbated if the asset category is perceived to be non-resilient for the future.
Loan-to-value ratios for new loans have decreased, with many senior loans being offered at 50% LTV or even lower. Loans with LTVs up to 60% are typically priced in the range of 5% to 5.9% for a five to seven-year term. However, any whole loan exceeding 70% LTV is subject to significantly higher interest rates, ranging from 6% to 8% for prime assets and 7% to 10% for less desirable ones.
The pricing of bonds did not offer any discernible advantage. In the first half of 2023, a total of €8bn of new bonds were issued in Europe. Of this, €2.7bn was allocated to logistics, €1bn to retail/shopping centres, and the remaining funds were directed towards diverse investment strategies. The most favourable pricing was attainable for long-term bonds (exceeding 15 years), which carried an average coupon rate of 4.2%. Bonds rated at a minimum of single-A achieved an average coupon rate of 4.5%.
Green bond issuance now accounts for 20% of the European market, but only 4% in the UK.
Lux said: “The European debt market is seeing its most difficult year post the global financial crisis in 2008/09, and we expect that more distress is yet to come due to the longer-term debt maturities in the European market.”
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