Lenders look for late-cycle business off the beaten track

The queues to enter the venues at MIPIM, the annual real estate fair that was held in Cannes last week, highlighted another busy event at which property market participants competed for fresh opportunities at this late stage of the market cycle.

The number of attendees at MIPIM – 26,800 according to organizer Reed MIDEM, which is 800 more than last year – demonstrated the industry’s continued strength against the backdrop of ultra-low interest rates and bond yields over the past 10 years.

However, as competition intensifies, yields have fallen, pushing some investors to seek higher returns beyond property’s mainstream, ultra-expensive core sectors. At this late stage in the cycle, many investors and lenders are risk-averse and are sticking to their areas of expertise in prime locations in mature markets. Yet according to sources canvassed by PERE sister publication Real Estate Capital at MIPIM, those lenders seeking slightly greater risk are more open to opportunities in spaces facing less competition.

“We see high liquidity in the main markets and segments,” said Patrick Walcher, global head of real estate at German bank LBBW. “As the cycle approaches its end, more investors are looking to non-prime locations or value-add assets. Debt funds generally find opportunities in this space, while bank lenders like us are still focused on prime core assets.”

Lenders are keen to maintain leverage discipline. Our sources were of the view that, just over a decade after the financial crash, opportunities for higher margins are mainly to be found through geographical and product diversification.

“Availability of debt and tight loan pricing clearly indicate we are still in a borrower friendly market,” said Duco Mook, CBRE Global Investors’ head of treasury EMEA. “Loan-to-values remain conservative, up to 60 percent or 65 percent with amortization for single asset financings. Rather than higher leverage, investors are looking to different asset classes and markets to capture higher yields, which is often followed by lenders.”

Savills says Germany, the UK and France will attract the lion’s share of the €230 billion that it projects to be invested in real estate in 2019. However, it adds that investment volumes in markets such as Poland, Denmark, Finland and Portugal will “significantly” exceed the countries’ respective five-year averages in 2019. Poland, in particular, is forecast to receive €7 billion of real estate investment this year. This would be a 46 percent rise on the country’s previous five-year average of €4.8 billion, and the largest increase in Europe.

Lenders are benefiting from increased investment outside the countries that are considered to be Europe’s core real estate markets. In Poland, prime offices are typically financed with margins ranging from 150 to 200 basis points at 60 percent LTV. This compares with pricing below 100bps in Germany or France and around 150bps in the UK, market sources say.

Fierce competition over the past year has kept margins low for properties outside the traditional core segments. Such properties can also provide attractive margins for lenders, particularly in underbanked parts of the market. Christophe Milliez, investment director at French debt fund manager Zencap Asset Management, says that loans for developments of large operational assets in France, such as student accommodation, senior housing or co-working facilities, can be priced above 3 percent and at a loan-to-cost higher than 60 percent.

“Even at a time when this sector is still developing in France, and in Europe more generally, these projects are still a very interesting option to secure higher margins compared with traditional asset classes,” he says. “We are targeting deals from smaller developers and operators of up to €50 million, a space with low competition from banks and where debt liquidity is scarcer.”

Although lenders are on the hunt for opportunities off the beaten track, the bulk of activity is still in the traditional space. The shift into alternative investment, however, is gathering pace. As investors increasingly deploy capital in less prominent markets and asset classes, lenders will follow suit.