Pramerica: signs of life in debt market

The US firm says in its latest European bulletin that the focus of bank lending is on core prime assets in Western European cities, but that there are signs of ‘risk appetite’ returning

Real estate debt markets in Europe are showing signs of life with the emphasis on prime real estate in Western European cities, according to US private equity real estate firm, Pramerica Real Estate Investors.

In its European quarterly bulletin, the Parsippany, New Jersey-based firm reports that even though there are ‘wider pressures’ on the banking system, there are signs that “risk appetite” is returning and that fears over real estate borrowing costs rising sharply are probably misplaced.

Presenting a mixed picture of bank lending, Pramerica notes the popularity of the European Central Bank’s (ECB) deposit facility – which pays an interest rate of just 0.25 per cent  – suggests banks are still reluctant to lend to one another on the interbank markets. This raises questions about how the system would cope unassisted, the firm said.

But it also said banks were once again competing for deals, with spreads in the German pfandbrief market nearly back down to pre-crisis levels. “Lending remains focused on prime assets in core Western markets, but debt is becoming more available in Central and Eastern Europe and on secondary assets in the UK and France,” it said.

“Some banks are even reconsidering development finance, although such deals are contingent on having tenants in place,” it said.

On the debt investment side, the firm said new bank loans were limited to a maximum loan-to-value of 65-70 percent and the market for mezzanine debt was growing.

Many property owners are seeking loans with LTVs of up to 85 percent, but Basel II rules on capital requirements effectively shut out banks from providing 70-85 percent mezzanine loans, the firm said. “With CMBS still off the table for all but a few deals, that creates a gap which is being filled by lenders who provide the additional proceeds through a ‘tri-party’ agreement. Mezzanine debt is attractively priced for lenders, suggesting that capital remains scarce relative to the size of the market. While this situation persists, borrowers will continue to find it hard to access funding for big-ticket deals.”