European CRE debt stock stable at €1.1 trillion
The problem legacy debt that has been troubling the European CRE market since the Global Financial Crisis continues to get smaller by the year, according to a new report from the world’s leading real estate provider, CBRE. Just 9% of outstanding debt now dates back to 2007 or earlier – compared with 13% at the end of 2015 and 18% at the end of 2014. The pool of outstanding lending is now dominated by loans made after the Global Financial Crisis, when capital values have been less stretched and more prudent underwriting standards have been in place.
Some problem debt does remain but several countries, including the UK, are now at the end of their programme of deleveraging non-performing loans (NPLs). Others, such as Ireland, have made significant progress, having reduced their NPLs by €34.5bn since 2015. For those still seeking opportunities in the NPL space, countries such as Italy and Portugal have lagged, although Italy made notable progress in 2016 with over €25bn of NPL transactions completed – a substantial rise on €5.3bn in 2015, and almost double the volume seen in Ireland at €12.8bn, the second highest total in 2016.
According to the report, deleveraging and new issuance were broadly in equilibrium in 2016, as the total value of European CRE investment debt dipped slightly over the course of the year, from €1.14trillion at the end of 2015 to €1.06trillion at the end of 2016. With investment transactions totalling €255bn in 2016, we estimate that €116bn of debt was secured against these purchases – a little below the €125bn of new debt issued in 2015 but very much ahead of the €68bn seen in 2013.
On the whole, debt terms were stable over the course of the year for senior debt on good quality property; only the UK saw a modest rise in margins in the aftermath of the referendum on EU membership. For secondary property, or higher LTV lending, there was however more evidence of a general increase in margins.
Looking ahead into 2017, CBRE believes that the “normalisation” of medium- and longer-term interest rates is likely to put upwards pressure on the total cost of debt, although this is likely to be less marked in Europe than in the US. This will likely have an impact on the direct market, potentially putting a floor under prime yields. That said, CBRE expects overall transaction volumes to remain strong, matching the level seen in 2016, as investors price in greater rental growth expectations on the back of a more favourable global economic outlook.
“Loan Portfolio trades by banks represent a key component of Europe’s economic rehabilitation. Whilst progress has been slow in some jurisdictions, we now expect a significant uptick, given both regulatory pressures and deep buyer demand for the right product, particularly in Southern Europe. This will be a positive step for liquidity in some segments of the real estate markets.” said Paul Lewis, Head of Loan Advisory at CBRE.
“Non-performing loan transactions have been very active across Europe as lending institutions work to deleverage problematic debt that has lagged since before the Global Financial Crisis. CBRE Capital Advisors are an expert in this sector, having been involved in over €56bn of European distressed debt deleveraging in 2016, and are therefore best positioned to advise clients looking to reduce their outstanding debt.” said Richard Dakin, Managing Director of Capital Advisors, CBRE.