The debt markets in Europe remain resilient. An extensive survey by CBRE among 130 companies shows that the lending environment is on a solid footing for when investment activity starts to pick up in the second half of 2024. Nearly two-thirds of respondents expect a recovery compared to last year with refinancing being the main source of demand. Industrial and multifamily are the preferred sectors for lending, with student accommodation and hotels seeing the strongest increase in demand.
“Altogether 63% of respondents expect to increase lending activity. Actually, a lack of investment activity is perceived as the main challenge to the current lending environment. This is why refinancing is expected to be the main source of demand for now, but there is ample credit available when buyers return. Willing lenders and a well-functioning lending market will be instrumental to market recovery,” comments Jakub Štěpán, Head of Valuation Czech Republic & CEE in CBRE.
The preferred sectors to lend against are industrial and multifamily, each of which was selected as the top sector by 34% of respondents. Sentiment has improved across all major sectors except for office, which lenders were more negative about than in the previous year. Altogether 83% of lenders are willing to lend against “alternative sectors” and living subsectors such as senior housing, healthcare, co-living and affordable housing are especially preferred by lenders.
“Despite lenders seeking to increase activity this year, there are several challenges facing the lending environment. Among the top three factors there is already mentioned the low level of investment activity followed by uncertainty around future property values and interest rates that remain higher for a longer time than formerly anticipated,” describes Jakub Štěpán
Two-thirds of respondents therefore expect underwriting requirements to either remain the same or be more conservative this year. Metrics such as Loan-To-Value and Debt Service Cover Ratios are the most important means for implementing tighter loan standards. The majority of respondents (83%) will seek hedging of their loans.
Most lenders are prepared to offer senior loans at 55%-60% LTVs, though in some sectors like multifamily this range is wider than in others (e.g. in Industrial). There is also a wide range in the margins quoted by respondents. In general, margins are lower for preferred sectors of industrial and multifamily and higher for retail and hotels. “Nevertheless, the good news is that most lenders are willing to offer a lower margin for loans against assets with good ESG credentials, mainly in the range of 5-20bps,” concludes Jakub Štěpán.
