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European real estate debt market to tighten in 2011

Lenders will become more selective and exercise greater caution, tightening the European real estate debt market through out 2011, highlights CB Richard Ellis in its Q4 2010 European Capital Markets report.

Over the longer term, the availability of debt will be constricted by regulatory changes, with Basel III seeing lenders (with the exception of insurance companies) increase the amount of capital they must retain on their balance sheets, the report says. In the short term, the debt supply will be further restricted by the withdrawal of some lenders from the market. For example, since the onset of the downturn, almost 40 lenders have withdrawn from the UK market and the recent announcements from prominent lenders in the market would indicate that this situation is unlikely to change in the near future.

Over the course of 2010, the European debt market witnessed a significant change in sentiment, which transitioned through three distinct phases. In the earlier part of the year, the market witnessed a notable easing in lending terms on offer, with a general increase in loan sizes and LTVs granted. Phase two, in late Spring, saw divisions created across Europe as the sovereign debt crisis spiralled. In Spain, for example, with concerns over the economy and sovereign debt downgrade, lending terms shifted significantly, even for top quality assets. Over the summer maximum loan size fell from €50 million to €35 million, while margins increased to 275 bps. In contrast, key Western European markets, particularly Germany and France, experienced growing competition amongst the banks to lend against prime assets, which resulted in further easing of lending terms on offer.

The final few months of 2010 saw further changes. Lending activity tightened across all geographies, both in terms of the number of active lenders and the terms available. This is already evident in more stringent terms on offer across all countries, and particularly in the recent increases in margin requirements - even in the UK, where these have been declining since mid-09.

“The withdrawal of lenders from the market either from international activity or real estate all together continues to take its toll. Coupled with the challenge of a huge refinancing wall of over €500 billion in Europe over the next three years, it is unlikely that new lending activity can truly re-start as in the near term attention will be focused on delivering solutions to legacy problems," said Natale Giostra, head of UK & EMEA debt advisory at CBRE Real Estate Finance.

With interest rates also expected to increase, the company expects to see European lenders become even more selective in 2011, with terms becoming more restrictive, which in turn will place further upward pressure on margins.