While insurers, such as Legal & General, AXA and Allianz, are enticed by the relatively attractive margins senior debt now commands and the fillip Solvency II has given with the low capital requirements, these emerging lenders are yet to originate senior debt.
But aggregated lending intentions provided to CBRE, both through origination and syndicated loan purchasing, indicates an average margin of 210 bps over LIBOR for insurance companies, with a maximum LTV of 68.8%. For the German pfandbrief banks, this compares to an identical average margin and a slightly higher LTV ceiling, at 69.5%.
After costs are fixed against a five year-swap, currently priced at around 260 bps, this makes the current average cost of senior debt by insurance companies and pfandbrief banks on UK property at circa 4.8%. Close behind are UK clearing banks, with margins 20 basis points higher, and a max LTV of 68%, nudging senior debt costs to 5.0%.
Natale Giostra, head of UK and EMEA debt advisory at CBRE, said: “Insurance companies have started to offer conducive terms and conditions. However, their current high amortisation costs will need to come down if they are to truly compete with the pfandbrief banks and gain a larger share in the UK senior lending market.”
These are just three out of seven property lender categories which CBRE’s research captures. At the other end of the spectrum are investment banks who charge margins at 400 bps over LIBOR. While these margins are much higher than the average, they offer the highest leverage, with the maximum LTV offered at 79.2%. This, in part, reflects investment banks’ preference to provide both senior and junior loans to borrowers.
UK non-clearing banks similarly charge much higher margins than the rest, at 370 bps over LIBOR at a max LTV of 68.3%. But this is because these lenders target residential assets which are deemed higher risk and so wider margins are rightly sought.
Stripping out these two outliers, the average margin for lenders to UK property which also includes data from non-UK European banks, Middle East and Asian banks is 68.5% LTV, with an average margin of 250 bps. This would put the average cost of senior debt across the 69 active lenders to UK property, assuming a sterling-based margin and five-year swap, at 5.1%.
CBRE’s research is based on 69 active property lenders, comprising 14 pfandbrief banks, 10 UK non-clearing banks, 10 non-UK European banks, 9 insurance companies, 8 UK clearing banks, 7 Middle East and Asian banks, 6 investment banks and 5 building societies.
By comparison, the cost of finance through convertible bond issuance, such as the subscription closed a week ago by Derwent London, is very competitive the REIT achieved a biannual coupon priced at 2.75%. The debt, as the name suggests, “converts” into ordinary shares at a price of £22.22, reflecting 30% premium on its current share price.
Whether or not a securitisation is cheaper than balance sheet senior debt lending will depend on distributing the rated bonds for less than the original cost of the whole loan provided. In the CMBS 2.0. era, and with the 5% retention ‘skin in the game’ requirement, not to mention investors’ so far lukewarm appetite, the ability to do that is far from a given.
And, of course, margins are far from borrowers’ only consideration when seeking finance, but it will never not be an important factor.