Real estate borrowing costs level off, but not for all

Investors’ search for income from “bullet-proof” prime assets across Europe is offering lenders relative safety

January 06, 2021

The cost of borrowing for commercial real estate investors has reached new lows for top-quality assets, but Europe has some way to go before lending is as equally competitive across all asset types and sectors.

Lending margins on real estate have fallen to below one percent for best-in-class properties in major European cities, and to around 1.7 percent in the UK, according to JLL. The cost of finance could be a further 25 basis points lower when borrowers only require around 40 percent leverage.

“We’re seeing some extremely competitive pricing for what can be regarded as bullet-proof assets,” says Michael Kavanau, head of debt and structured finance EMEA at JLL.

The low margins result in arguably the lowest rates in history off the back of 2020’s drop in LIBOR, the average rate at which banks are prepared to lend to one another.

“The significant drop in LIBOR has created lower all-in rates when compared with this time last year,” Kavanau says.

Across the multifamily, office and logistics sectors, bullet-proof qualities include prime locations, long leases and, at a time of severe disruption, reliable income. Premium office buildings in big cities are being viewed as a good way to ride out economic uncertainty, while large warehouse portfolios leased to major third-party logistics providers are similarly in demand, as are core multifamily properties.

“The best-of-the-best properties are attracting some of the lowest lending rates we’ve ever seen,” says Kavanau. “But the picture changes when you move beyond that.”

Vacancy levels are a main point of concern, with lenders looking less favorably on disrupted asset classes where occupancy has been impacted.


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For investors with their eye on refinancing, the quality of asset and tenant continue to count – but 2020’s disruption has opened lenders’ eyes to the varying levels of resilient assets.

“Covid-19 has shone a light on assets which could not stand up to the disruption,” says Kavanau. “Refinancing such assets will come harder than would previously have been the case, even though borrowing rates remain historically low. Lenders do not want to end up with impaired assets on their hands and if anything, the level of dialogue has increased.”

Most real estate finance packages put together in 2020 have not shifted beyond a 60 percent loan-to-value ratio, having looked like creeping beyond 65 percent at the start of last year.“

“There’s been a quite rational approach by all lenders to leverage,” says Kavanau. “It’s also to be welcomed as it keeps the market in check; the high loan-to-value ratios of the previous real estate cycle leading up to the global financial crisis of 2008 are firmly a thing of the past.”

The availability of debt owes much to strong fundraising by debt funds; globally, a record high of US$ 38 billion (€32 billion) was raised in 2019, according to the INREV Debt Vehicles Universe 2020 study, higher than in any year since INREV’s records began in 2013.

“A wider range of fund managers and investors are attracted by real estate debt strategies which offer not only returns, but an inroad into real estate as an asset class – with a buffer and without over-exposure to underlying real estate risk,” says Kavanau.

For now, the disparity in disruption levels from Covid-19 means the focus for lenders remains on resilient real estate. However, with vaccines being rolled out, a return to normality for disrupted sectors should make the cost of borrowing more competitive for a wider range of real estate investors.

“That’s still some way off but 2021 is hopefully the year when a broader range of assets fit the bill,” he concludes.

Contact Michael Kavanau

Head of EMEA debt and structured finance

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