As banks rein in their commercial real estate exposure, borrowers are turning elsewhere.
Distress in US real estate markets sent shares in Deutsche Pfandbriefbank (PBB) to a record low this year. Its reaction is both more and less lending into struggling property markets. The specialist lender has been selling assets to cope with rising loan-to-value ratios. But, hoping to make up for a shortfall in new lending, it is also talking to investors about raising up to €500mn for an inaugural private credit fund.
As banks rein in their commercial real estate exposure, borrowers are turning elsewhere. PBB thinks it can help plug the financing gap by funnelling pension and insurance capital into senior real estate debt. Meanwhile, sales of real estate bonds have boomed this year. The result is that even distressed borrowers are managing to raise funds from private lenders at the right price.
Debt capital market volumes in European real estate have rebounded to €15bn in the year to date, says Dealogic, about double what they were for the same period last year (though still half 2022 levels). That is in spite of the gloom hanging over northern European property markets, where excessive leverage and falling valuations are biting.
Take PBB: its lending volumes fell by a third in the first three months of the year. Loan-to-value ratios continued to rise, especially in the US: its average LTV ticked up 4 percentage points to 68 per cent for its performing portfolio of mostly east coast office buildings. Average LTVs for PBB’s entire performing book also rose to 54 per cent.
Bond markets seem more than happy to plug holes left by banks’ retreat, with rents and occupancy solid for many owners. “With spreads the tightest they have been in many years, bond markets are able to service most refinancing needs for good credits,” says Peter Papadakos of Green Street.
Take Swedish office owner Fabege, which reported occupancy of 86 per cent in the first quarter. Two-year notes issued in May are currently trading at a spread over government bonds of 220bp.
Compare that with refinancings for Swedish social housing and healthcare owner SBB, where loan-to-value ratios remain elevated even after a period of deleveraging. A private debt deal struck in May with Castlelake was priced at a benchmark spread of 375bp, which compares favourably with a similar deal in February priced at 500bp.
Investor appetite to lend at higher interest rates has pushed down spreads this year. In turn, that is helping Europe extend and pretend its way out of a more testing real estate bust.
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