European banks favouring lending against prime real estate assets
31 Mar, 2009, London
A survey of 83 of the largest European banks by Cushman & Wakefield has found that although 59 per cent are effectively closed to new business and are not lending against commercial real estate, there is appetite from the remainder for lending against well let prime assets with established borrowers.
In the survey, of the 22 that are lending to new clients, many have caveats regarding how much they would lend and to whom. Conditions include the investor having a proven track record with a pipeline of deals or having a minimum net worth. Of these 22 lenders, half preferred deals involving lot sizes of less than £20m with the rest able to finance deals as much as £50m.
In addition to the decline in the number of lenders, loan-to-value ratios have also fallen demonstrating that banks are demanding less risk in acquisitions. In the UK the ratios are 60-70 per cent down from 80-85 per cent before the economic downturn. In Western Europe the ratios are 50-60 per cent down from 85-90 per cent.
Ed Daubeney, partner in Cushman & Wakefield’s corporate finance team, said: “The credit crunch has significantly reduced the availability of debt financing for property transactions and some banks who are over-exposed to the property market have effectively withdrawn from writing new business. The balance sheet lenders that are still lending to the market now have far stricter loan criteria and are demanding higher margins and lower loan to value ratios. There are however pockets of capital available for the right deal. Market dynamics will lead decision making and banks will focus on lending to experienced borrowers on prime properties let to investment grade covenants on long leases in Western Europe and other core markets.
“We consider there to be up to 15 lenders who are actively lending to new clients without many pre-conditions. There is a distinct "flight to quality" in the current debt market. You can still arrange funding for experienced borrowers for prime assets with long leases let to investment grade covenants.”
The lack of lending against commercial property has led to a huge fall in the volume of completed deals. Global investment in commercial property fell 59 per cent in 2008 to $435bn down from 2007’s record total of $1,050bn. This was the lowest annual total since 2004 with a significant decline in investment from foreign investors. Figures from Cushman & Wakefield’s Investment Atlas 2009 also predict that volumes will fall again this year to around $412bn.