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Lenders revisit their risk / return profile.
Throughout 2015, an influx of liquidity combined with the relative shortage of « Core » investment products, pushed initial yields further down, benefiting equity-only buyers. Across the rest of the risk spectrum, lenders have revisited their lending policies to preserve market share and loan margins.
Volume: Equity-only investors, headed by collective saving schemes, insurance companies and listed REITs, have again dominated the investment market in 2015. Structured real estate finance volumes have therefore declined to €2.5bn. The market has returned to "historical norm" with a total of 20% (by number) of acquisitions actually using debt. While the largest transactions still translate into a greater proportion of debt-funded deals, it is worth mentioning that the €50-100m range of acquisitions has doubled its use of leverage in 2015.
LTV: Lenders regularly and quickly update and adapt their lending policies. This has so far translated into an increase in « Core+ » and « Value-Add » LTVs to 75% and 79% respectively. As far as « Core » is concerned, LTV has slightly decreased to 60%. This latter trend is a direct consequence of the dramatic drop in property yields. Such a drop puts a lid on leverage given the recently introduced Debt Yield covenant, which cannot be met when exceeding a given leverage ratio.
Funding costs: « Core » asset margins have gradually decreased throughout the year, and have reached a low of c. 90bp p.a. at the end of 2015. Swaps rate have also dramatically shrunk, to the point of being negative up to a 5-year term. Unfortunately, lenders have inserted floor provisions in loan agreements and few borrowers actually enjoy negative rates.
Outlook: The outlook for the French investment market points to a higher share of « Core+ » or « Value-Add » deals in 2016, as well as a larger proportion of big ticket acquisitions. We expect loan volumes to increase moderately in 2016, fuelled by a surge in the number of debt-funded acquisitions. Lenders have maintained a stringent underwriting and risk-review process, we do not anticipate an increase in LTV levels, or a further margin compression.
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15 March 2016