Borrowers now paying all-in 6% for prime assets

A new Bayes Business School report on lending in Europe shows that borrowers are paying up to 6% total interest on loans on prime European real estate.

The pilot study, authored by Dr. Nicole Lux of London's Bayes Business School, analyses the lending and pricing behaviour of different groups throughout Europe through February 2023, and demonstrates how the overall interest rate for a loan on a prime, stable asset in European cities is now between 4% and 6%, compared to between 2% and 3% a year ago.

“Especially for the Continental European property market, where property yields for prime offices have been ranging from 2.75% to 3.5%, the level of financing rates cannot be sustained and are forcing property values down or leaving borrowers stranded,” the report said.

Dr. Lux, a Senior Research Fellow at Bayes Business School (formerly Cass Business School), shows in her report how lenders from German banks still offer some of the highest loan-to-value (LTV) for fixed assets (between 75-80%) and loan-to-cost (LTC) for development loans (between 77-82%). Other European bank lenders were more conservative (between 55-60% LTV and 60-75% LTC).

“Banks are quite consistent in their approach to loan pricing across prime locations such as Paris, Berlin, Madrid,” said Dr. Lux. “So, there is a narrow range of pricing for prime real estate in the major European capital cities. With equivalent borrowing costs, European investors need to think carefully about future returns when acquiring an office property in Berlin versus Madrid.”

“We saw a clear difference in pricing, which is comforting to see, as there was a convergence of pricing regardless of asset in the last cycle, prior to the global financial crisis,” explained Lux.

“The 4-6% pricing (for prime, stabilised assets) is inclusive of three-month Euribor, and the margin for stable assets is within a 120-200bps range, with 150bps as the average. Opportunistic assets are financed within a margin range of 200-300bps, with an average of 250bps,” she said.

Among the other key findings of her report are; how loan rates charged for opportunistic and repositioned assets are very different, especially among loan fund lenders. They can range from 5.5% to 7.5% (total interest); how loan prices can vary significantly depending on loan size, with higher rates charged on loans below €5m; and the importance of borrowers knowing their local lender, with 92% of banks still lending only in their home market, with only 8% lending across Europe - while 38% of debt funds pursue a multi-country strategy.

Dr. Lux sees a consensus that a slightly higher LTV rate and a lower credit margin do apply to stable capital investments rather than to opportunistic or repositioned assets.

With the continued rise in interest rates, a floating lending rate on a stable asset is now between 4-6% across Europe, including the Euro Interbank Offered Rate (Euribor). Opportunistic or repositioned assets are priced 60-100 basis points higher, she says.

Dr. Lux found little consistency in junior financing rates, with significant differences by type of asset, location and lender type. For repositioning and development projects, it showed that mezzanine margins are typically around 15 percent on a fixed basis, including all fees, with loan-to-values ranging from 70% to 92%.

Among the other findings of the Bayes Report are that there are clear pricing differences between preferred loan sizes depending on the type of lender. Smaller loans may be priced higher due to lower lender interest, as are very large loans (up to €100 million) that may require more than one lender. The typical "sweet spot" is between €20 and €50 million, where the lowest and most competitive lending rates apply (between 1.5% and 2.5% floating rate for a five-year loan term plus Euribor).

Additionally, there is also little uniformity in interest rates for subordinated financing. The lending rates offered can vary widely depending on the type of asset, the location and, most importantly, the type of lender. Rates can be particularly high when lenders have little interest in lending on a particular asset class, resulting in very limited supply or liquidity, ranging from 15% to 18% for up to 85-90% of the loan-to-value. Borrowers also need to be very clear as to whether the quoted lending rates include all fees or whether they are charged extra, without which it can be difficult to compare the rates of different loan funds.