Over 70 per cent of those surveyed reported an increase in new loan originations over the past six months, with similar trends observed for refinancing, reflecting the recovery in investment markets. Of particular interest is the reduction in aggregate lending during this period, put down to write-downs and completion of loan portfolio sales during the final quarter of 2014, which was ahead of previous expectations.
While the three core European markets of the UK, Germany and France, remain the primary focus for lending, activity is shifting towards other markets, with an increasing number of organisations willing to lend in Italy and Spain. Growth is particularly noticeable in Italy where the share has increased from 4 per cent to 9 per cent.
In the core European cities (London, Paris, Frankfurt) lenders are offering higher LTV ratios relative to the other markets (typically above 60 per cent), whereas in most cases LTVs remained low, with Milan, Madrid, Amsterdam and Brussels averaging around 50 – 60 per cent. Margins are also being squeezed lower in the core cities, averaging 160-165bps, and higher outside.
Edward Daubeney, DTZ’s Head of Debt Advisory EMEA, says: “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.”
A more diverse lending base was also observed, as new non-bank lenders increase their footprint and activities, filling the space left by banks and leading to increased competition in the marketplace.
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 (pictured), Head of Capital Markets Research at DTZ, says: “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.”
Source: Property Fund World