Our latest annual debt review provides comprehensive analysis of 2015’s trends and considers how and why 2016 may be different. Our key conclusions are: Last year, new lending doubled, rising to €127 billion based on a record €273 billion of CRE investment. Lending margins were generally stable for bilateral lending and LTV levels stayed low, by historic standards. Despite the rise in new debt issuance, the total value of European CRE debt in 2015 was only slightly higher than in the previous year, at €1.1 trillion, because new lending was offset by the retirement of existing debt. NPL activity was robust. Sales were up 23% in 2015 to €85 billion. Dry powder for loans and distressed assets is high and pressure is rising on European banks which have yet to address long-standing, non-core loan books, meaning the pace of deleveraging will continue. Investors have become more cautious. This change in sentiment is a factor in a slowdown in 2016 investment activity and is likely to affect loan pricing.
Downward yield movements becoming scarcer With prime yields across Europe having been on a downward trend for nearly four years, further falls are now becoming scarcer. Of 159 location/sector combinations monitored in Q1, only thirty-six saw yields move lower compared with an average of sixty-five each quarter through 2015. Notable market that saw yields fall in more than one sector over the quarter were Brussels, Prague, Amsterdam, Helsinki and Stockholm. Rental increases remain patchy, perhaps affected by heightened economic uncertainty in some markets. Office rents rose in Berlin, Dublin and the City of London, retail rents in Milan, Rome and Budapest, and industrial rents in Dublin, Stockholm and Istanbul.
•CRE investment in Europe totalled €50.7 billion in Q1 2016, though down on the €60.5 billion recorded in Q1 last year, it is the third best first quarter on record. •The lower level of European investment is driven by a dip in Western Europe, with year-on-year falls in UK, Germany and France; all three of Europe’s largest markets. •The Russian market recorded a significant uptick boosted by a couple of large transactions. •Of the main sectors industrial had the strongest growth, with €5.8 billion invested, this was driven by increased investment in the UK, France and Germany.
While investor demand will remain strong in 2016, the ‘froth’ is coming off, with a closer balance between investors expanding their acquisitions and those reducing their activities. There was a big increase in interest in countries and cities in the CEE. At the sector level retail gained in popularity compared to last year, but the jump in interest in investment in the residential sector stood out.
The recent equity market volatility has focussed many minds on downside risk but there are good reasons to expect that European property will outperform other assets in 2016. Office leasing is still in an early stage of recovery in many European countries/cities, and occupier demand will continue to improve as the economic recovery continues. Office vacancy rates fell at the fastest rate since 2007 in 2015 and are expected to fall further in 2016 helped by a so-far limited development response in most markets. The dichotomy between high performing prime and struggling secondary retail will remain in 2016 but at least rising retail spending on the back of higher real disposable incomes will be of some benefit to all retail. There is increasing emphasis on city logistics property with investors as well as occupiers attracted by the necessity of these properties in e-commerce supply chains.