10 Jul 2023
Key findings Q2 2023
FinLoop's Q2 2023 Debt Liqudity Baromater analysis shows sharp increase in overall transaction volume but significantly lower loan-to-value ratio for new loans.
- Since the start of 2023, FinLoop's digital debt marketplace for commercial real estate loans has witnessed a rapid surge in transactions (€5bn total volumen), experiencing a remarkable 150% increase compared to the same period in H1 2022.
- Debt funds are the most active lender group, while many banks have paused, and are very cautious about new lending, Debt funds are also keeping the development market active, and are working closely with borrowers to finalise construction projects.
- Among the various asset types, investors have primarily sought financing for residential assets, constituting 26% of loan requests, followed closely by logistics at 25%, retail at 12%, and hotels at 11%. Office-related loan requests accounted for a smaller portion, representing only 4% of the total.
- At the same time, requested loan-to-value on for loans has declined for office assets to 35% from 59% between Dec 2022 and June 2023, logistics to 47% from previously 65% LTV, residential to 49% from 53% LTV.
- Acquisition financing has dominated the loan landscape, accounting for 48% of transactions, indicating active deal-making. Conversely, re-financing constituted only 11% of the requests, while development finance accounted for a significant portion of 37%.
In Q2 2023, FinLoop has witnessed a significant surge in new financing transactions on its platform, amounting to nearly €5 billion. This remarkable growth can be attributed to the increasing acceptance of digital portals for financing, but also reaffirming the continued demand for acquisition financing. "As an online platform, FinLoop is at the forefront of observing market changes, with borrowers actively exploring alternative options", notes COO Nicole Lux. Among the various asset types, investors have primarily sought financing for residential assets, constituting 26% of loan requests, followed closely by logistics at 25%, retail at 12%, and hotels at 11%. Office-related loan requests accounted for a smaller portion, representing only 4% of the total. Hence, the recorded transaction growth confirms the commercial real estate finance market remains active.
In the last six months, a significant and noteworthy change has been observed in the Loan-to-Value (LTV) ratio, which represents the proportion of total debt borrowers are seeking from lenders. In 2022, the average LTV ratio for investment assets stood at approximately 64%. However, this figure has since decreased to 51% LTV, and for development financing, it has further dropped to 49% Loan-to-Cost (LTC). Bridging loan requests, on the other hand, have been observed at a level of 58% LTV. This trend is evident across all European countries, with the most substantial downward adjustment observed in Germany.
The LTV adjustment together with further increasing property yields have helped the sector to improve loan affordability, improving day one ICR levels. While office yields have been rising in all EU key cities, the sector still struggling the most is the large German residential sector, where net income yields remain very low causing problems with interest payments. During the first half of 2023, Euribor has experienced a significant increase of 140 basis points. Furthermore, it is anticipated that the European Central Bank will implement additional interest rate hikes, bringing Euribor to an expected rise in the latter half of 2023. These developments indicate a potential upward trajectory for Euribor and potentially a further increase for European property yields.
Despite recording a considerable portion of finance requests (38% of €5bn) for development assets, the low loan-to- cost ratio indicates that the development finance sector is experiencing a significant slowdown, although it has not entirely halted. The subdued loan-to-cost ratios suggest a cautious approach and reduced appetite for financing in this segment.
Investors are also actively seeking junior and mezzanine financing via the FinLoop marketplace, but also these are at levels of only 51% - 58% LTV. Mezzanine loans are not used as a leverage instrument to boost equity returns, but rather as a more flexible solution compared with senior debt for turnaround assets or to solve a special situations for a short period of time on assets which might not deliver sustainable cash flows to attract a senior debt offer.