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Sharpest senior margins fall to sub 100 basis points amid broadly stable outlook

Blended senior loan lending margins for prime commercial real estate in Europe’s core cities of London, Paris and Frankfurt have tightened to around 160 basis points, according to a new lending survey by DTZ, with growing instances of sub 100 bps term sheets offered at the sharpest end of the market.

These blended margins – derived from a survey of 59 lenders throughout Europe and comprising average margins across offices, retail and logistics – mask the tightest sector-specific terms offered, which tend to fall in these cities’ office markets.

More anecdotally, according to DTZ, the tightest senior loan margins this year have fallen to sub 100 basis points for low-leveraged, stabilised prime commercial properties in core European cities, such as Frankfurt.

Pfandbrief-funded banks in Germany – who finance lending through jumbo pfandbrief bonds of between €500m and €2trn that are typically priced at sub 25 basis points – are financing assets in Frankfurt at between 50% and 60% LTV at sub 100 basis points.

Furthermore, for sub 50% LTV financings, competitive term sheets as much as 20 bps lower are now being offered.

Margins in Paris and London– again at the most core, prime end of the market – are both reaching 110 bps and 120 bps, respectively.

Again with the tightest margins often from pfandbrief banks which when financing in London have to price in currency hedging costs which result in slightly higher margins than they are able to offer in the Eurozone.

Pfandbrief banks are by no means the only banks offering these terms, but are believed to be most regularly able to do so.

More broadly, margins have come in across the board over the last three years, with the pace of loan margin compression having slowed in core markets, with many lenders hoping margins are near, if not already at, a new pricing floor.

Ireland has anecdotally seen the fastest senior loan margin compression, which has dove-tailed with the country’s remarkable commercial property market turnaround.

In the last 18 months, senior margins on Dublin offices have literally halved, reflecting compression at pace beyond the prime London office experience in recent years.

One notable example in Ireland is Morgan Stanley’s €245m five-year senior loan to finance Starwood Property Trust’s four-strong office portfolio acquired from Lone Star, priced the senior loan at 190bps. In addition to domestic competition from Bank of Ireland, Helaba and Deka Bank, according to a CoStar News story back in March.

This re-emerging trend of lending beyond core markets was also a theme in DTZ’s European Lending Trends report, published today, as lenders look to move up the risk-cure to make their returns.

The vast majority of lenders surveyed in DTZ’s European Lending Trends report, published today, expect lending activity to increase or remain stable compared with the last six months, while certain lenders continue to increase their LTV thresholds.

DTZ also pointed to a notable pick-up in lenders willing to lend in Italy and Spain.

Edward Daubeney, DTZ’s head of debt advisory EMEA, said: “Lenders’ responses to our survey highlight an appetite for greater risk in ‘Tier 1’ cities, as investment markets continue to recover and the unwinding of legacy debt continues.

“Although lenders remain disciplined on risk, there has been a willingness to move up the risk curve in ‘Tier 1’ cities, with increased lending on speculative developments, especially in core cities where the availability of Grade A stock remains low. However, this trend is not reflected in ‘Tier 2’ and 3 cities with lenders continuing to be risk averse.”

Over half of lenders surveyed considered the biggest risk for lending markets to be the weight of capital with other significant factors being the extended Eurozone deflation and the slowdown in China. The potential exit of Greece from the Eurozone was perceived as a much lower risk.

Nigel Almond, head of capital markets research at DTZ, said: “With record levels of new capital targeting real estate, prime yields are being compressed to previous, and in some cases new, lows.

“Although real estate is still offering relatively good value in this ultra-low interest rate environment and spreads over bond yields remain high, this could change significantly and rapidly if rates increase.

“However, our survey shows lenders are being rational and focused on risks. Thus, in the current cycle it appears that debt (and lenders) are less exposed compared to investors who are having to invest greater levels of equity.”

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