Bank lending remains the critical source of debt to the real estate industry in Europe accounting for at least 90 percent of the corporate real estate (“CRE”) debt held relative to other alternative funding sources, Colliers International said in its latest report entitled ‘How long will this property bull market last?’. However, the increase in lending capacity in North America could improve conditions indirectly by providing leverage for US cross-border investors.
Walter Boettcher, EMEA Research Director and Economist, Colliers, said: “The current investment cycle is remarkable because it has been driven primarily by equity. Debt has been the missing ingredient in many markets, due to the prolonged period of deleveraging in response to the credit crisis and subsequent regulatory changes. The availability of debt to allow property investment deals to be leveraged and to develop new assets is a critical to prolong this bull market.”
There has been a lending recovery in North America where CRE lending is driven by a variety of sources including banks, institutions, bonds, CMBS and alternatives. CMBS issuance has increased significantly over the last five years from US$2.7 billion in 2009 to US$94 billion in 2014, which highlights the speed that lending capacity is increasing in the US. A number of US investors are becoming increasingly engaged in building CMBS capacity in Europe, which could have a decisive impact by providing an alternative to bank originated debt.
Europe is a very different picture although conditions are improving. The pattern of lending is shaped almost exclusively by banks, so the offer is uneven at best but remains fragmented and broken in many markets. Eurozone banks have been deleveraging at an average rate of €40 billion per quarter, while the UK banks’ outstanding loans have been contracting at £11 billion per quarter over the same period.
The UK market was the hardest hit post-crisis as foreign banks pulled back leaving UK-only banks active. Data from the 1990s downturn shows that banks deleveraged for 6.75 years with outstanding amounts to real estate falling from 10.1 percent of all lending to 4.9 percent. In the current cycle, UK banks have been reducing exposure to commercial property for 5.5 years from 11.6 percent to 6.9 percent at the end of Q3 2014. This suggests that there could be another 12 to 18 months to go before exposures begin to increase in the UK.
Damian Harrington, Regional Director of Research for Eastern Europe, Colliers International, commented: “Many countries are still seeing active bank deleveraging, but its impact differs significantly by location which has effectively altered the speed at which individual markets move along the current bull cycle. From a UK and European perspective, deleveraging may have taken time but the worst appears to be over breathing new life and funds into the lending market.
“Lending is now sufficiently competitive in some markets that margins are dropping and in turn placing further downward pressure on property yields. Increasingly, individual markets are offering a wide variety of ‘debt capacity positions’ against the global backdrop of low interest rate and high capital pools. These latter two factors largely determine the speed at which individual property markets move along the investment curve.”