Banks’ dominance diluted as market share falls from 67% to 55% in the past year
The dominance of traditional bank lenders – including both commercial and investment banks – in commercial real estate (CRE) lending in Europe is decreasing due to the rise of alternative lenders, according to Cushman & Wakefield’s annual European Real Estate Lending Review, published today.
Cushman & Wakefield’s Corporate Finance team analysed the activity of 161 European lenders for the report – encompassing senior, stretch senior and mezzanine debt lenders – to assess lending appetite and identify key trends which will shape the European finance market this year. CRE loans originated and refinanced over the past two years were also tracked in order to see which sectors and markets were the most active.
Although banks accounted for more than half (55%) of all CRE lending analysed in the survey, their market dominance has been diluted in the past 12 months: the proportion of traditional banking lenders has fallen from 67% in Q1 2012.
The report states that although banks are not necessarily lending less, their market share has been driven down by the presence of new alternative lenders. For example, there has been a 29% increase in the number of debt funds and private equity lenders since Q1 2013.
Based on data taken from the survey, Cushman & Wakefield’s Corporate Finance team also recorded a significant 30% increase in the amount of capital lent against real estate in the last 12 months. Meanwhile, a 10% rise in the number of active lenders has led to greater competition and a reduction in pricing across European markets.
Michael Lindsay, head of EMEA Corporate Finance at Cushman & Wakefield, said: “We have seen the European lending market become increasingly diverse over the last 12 months, slowly moving towards the US model where the number of banks is equally matched by alternative lenders. With regulatory burdens exerting pressure on the profitability of CRE lending for banks, we expect insurers, debt funds and private equity firms alike, to accelerate the development of their lending strategies.”
Further detail on the report’s key findings:
30% increase in capital lent against European CRE
2013 was characterised by the return of the leveraged buyer. With a 30% uptick in capital lent against European CRE since 2012, activity has moved steadily from refinancing to new lending. During 2013, many lenders announced upward revisions of their lending targets, highlighting the increasing amount of capital targeting CRE lending. Despite this, in most markets, borrower credentials remain key to the availability of finance – the quality and accuracy of information presented to lenders has become of paramount importance.
Number of active lenders rises by 10%
The number of active lenders open for both new business and to existing customers has risen by around 10% since Q1 2013, providing a welcome boost to investment market liquidity and activity as well as an improvement in loan application timescales. Of the 161 lenders analysed for the report, 78% said they would be willing to lend to new customers with whom they had no previous relationship, representing a 19% increase since last year.
Diverse financing and greater competition reduces pricing
The increasing level of competition has helped bring down pricing in almost all European markets, creating an attractive environment for borrowers. As a result, some lenders are more ready to assume greater risk by broadening their geographical and sector preferences in order to derive sufficient returns. Furthermore, the definition between senior and mezzanine finance is becoming blurred, with senior lenders often willing to lend on a whole loan basis, up to 75% LTV.
41 debt funds are looking to raise €22.1 billion of capital in 2014
Cushman & Wakefield’s Corporate Finance team is currently tracking 41 senior and mezzanine debt funds open for investment/currently investing. Based on the maximum target size, these debt funds have an estimated firepower of approximately €22.1 billion. Cushman & Wakefield forecasts that over the next 12 months, approximately €5 billion will actually be raised as European and global investors become increasingly familiar with the debt fund opportunity.
Increased appetite to lend within secondary and non-core markets
A noteworthy feature of this year’s report was the increasing appetite for lending against secondary assets/locations. While lenders remain focused on sound covenant strength, there is a demonstrable willingness to provide finance for secondary assets in core locations or prime assets in core locations. The main drivers for this trend have been an improving macroeconomic background in many European countries, increasing competition and a drive for higher returns from some factions of the lending market.
Development finance lending increases from 31% to 42% in two years
The growth in the number of lenders willing to provide development financing where a pre-let has been secured continued to show a steady increase. The percentage of lenders willing to lend against pre-let CRE development increased from 31% to over 42% over the past 24 months.
Growth of preferred ticket sizes
Last year, Cushman & Wakefield reported a growing range of preferred ticket sizes among lenders, with the average upper range rising from c. €50 million to the €65 million-€70 million range. This trend continued throughout 2013, with the average upper range rising to €80 million-€90 million, partly reflecting the implementation of ambitious lending targets. Additionally, the numbers of lenders willing to provide loans of over €50 million has doubled since 2012.
Western Europe remains top lending target but ‘non-core’ markets on the rise
An analysis of all CRE loans provided during 2013 shows that the core markets within Western Europe – namely the UK, France and Germany – have remained the top targets; 70% of all loans were secured by assets within these markets. However, an encouraging number of lenders have started looking at ‘non-core’ markets, given the opportunities which have emerged. The number of active lenders targeting Spain, Portugal and Italy increased by 37%, 17% and 11% respectively over the year. Elsewhere, the appetite for the dominant Central and Eastern Europe (CEE) markets increased by 17%, while the percentage of active lenders in the Nordics showed little fluctuation. The volume of CRE loans provided within Spain and Italy has tripled since 2012. In the core markets of UK, France and Germany, the volume of loans granted increased by an average of 17% over the period.
€34.0 billion of CRE loan and REO sales completed in Europe
According to data recorded by Cushman & Wakefield, the European CRE loan and real estate-owned (REO) sales markets saw €33.7 billion of closed transactions in 2013; a 46.5% increase on the €23.2 billion closed in 2012. This highlights the ongoing deleveraging of European institutions and asset management agencies.
Resurgence of CRE loan securitisation and CMBS markets
The CRE loan securitisation and CMBS market has shown signs of reawakening. Over €8bn was issued during the year, representing an eight-fold increase compared to 2012. With the publication of the CMBS 2.0 Guidelines and re-emergence of investor interest in such products, it is likely that Europe will follow the US trend and see larger volumes in 2014. Cushman & Wakefield predicts issuance this year of between €12 billion and €15 billion.
Mike King, a senior analyst in Cushman & Wakefield’s Corporate Finance team, said: “The increase in the number of active lenders has helped drive down pricing in a number of markets around Europe within a very short timeframe. With competition intense, we expect to see these lenders move up the risk curve and increase their penetration of the previously labelled ‘non-core’ markets, to take advantage of the plethora of opportunities available.”