New Bayes European lending report finds that borrowers are paying up to 6% all-in interest for loans on prime European properties

The first Bayes Business School European Commercial Real Estate Lending Report has revealed the lending and loan pricing behaviour of different groups across Europe.

Authored by Dr Nicole Lux, Senior Research Fellow at Bayes Business School (formerly Cass), the pilot study finds that the all-in interest for a loan on a prime stable asset across European cities now ranges between 4-6%, up from between 2-3% just a year ago.

In Europe, German bank lenders still offer some of the highest loan-to-value (LTV) for investment assets (between 75-80%) and loan-to-cost (LTC) for development lending (between 77-82%). Other European bank lenders have been more conservative (between 55-60% LTV and 60-75% LTC).

Key highlights from the report, which covers data up to February 2023, also includes:

• Support for repositioning and asset improvement but costly: Loan interest charged on opportunistic and repositioning assets differ more widely, especially among debt fund lenders. It can range between 5.5-7.5% (all-in interest)
• Size matters: Loan pricing differs significantly depending on loan size, with rates for smaller loans less than €5million being charged higher rates
• Borrowers need to know the local lenders: 92% of banks still only lend into their home market, while only 8% engage in lending across Europe without external subsidiaries or branches. In comparison, 38% of debt funds pursue a multi-country strategy.

Dr Lux said there is a consensus that stable investment assets may attract a slightly higher LTV rate and a lower lending margin than an opportunistic or repositioning asset.

With the continuing increase in interest rates, a variable loan interest on a stable asset now ranges between 4-6% across Europe, including the Euro Interbank Offered Rate (Euribor). Opportunistic or repositioning assets are priced 60-100bps wider.

The report also found that pricing differences are apparent between preferred loan sizes, depending on the type of lender. Smaller loans might be priced higher because there is less lender appetite, as well as very large loans (up to €100 million), which might require more than one underwriting lender. The typical sweet spot is between €20 and 50 million, which attracts the lowest and most competitive lending rates (between 1.5-2.5% variable margin rate for a five-year loan term plus Euribor).

When it comes to junior financing rates, there is little consistency. Loan rates offered may differ widely depending on the type of asset, location and especially type of lender. Rates can be specifically high if there is little appetite from lenders to lend on an asset class, leading to very limited supply/debt liquidity reaching between 15-18% for up to 85-90% of LTV. Borrowers also need to enquire carefully if the quoted loan interest includes all fees or if these are charged extra, making rates often difficult to compare between debt funds.

Dr Nicole Lux said:

“We are pleased to have received many valuable data submissions for this first European pilot survey. This report shows the speed at which interest rates for real estate loans have been increasing, affecting also lending costs on prime stable assets in Europe’s biggest and most influential cities. Therefore, the pressure of declining property values is decreasing.

“We hope to build on this on a regular basis to bring further transparency into the European private debt market.”

The Bayes Business School European Commercial Real Estate Lending Report can be read in full here.

Ends

Notes to editors

1. In April, Bayes Business School will release the bi-annual UK Commercial Real Estate Lending Report, authored by Dr Nicole Lux. An exact release date is TBC.