Rising interest rates offset falling margins in some markets, as cost of European commercial real estate debt inches up in Q3

London | 11 December 2018

The cost of senior borrowing rose in Q3 2018 according to the latest data from global real estate advisor, CBRE. CBRE’s quarterly European debt map shows a general trend for rising costs over the quarter, driven largely by an increase in interest rates. Five year swap rates (which are used as a proxy for the interest rate component) rose in each of the 20 countries over the quarter, adding an average of 13bps to the total cost of senior debt (ranging from an 11bps increase in Switzerland to 19bps in Norway and Sweden).

As a result, the total cost of senior debt was higher on average across the whole of Europe (rising 11bps to 2.28%) and flat or higher in the four major country groupings – G7 countries (up 4bps to 2.03%), Scandinavian countries (up 14bps to 2.23%), rest of Western European countries (flat at 1.90%) and CEE countries (up 32bps to 3.06%).

A few countries bucked the trend, offsetting either partially or entirely rising swap rates with falling margins. Italy and Sweden saw senior margins fall by 10bps, while LTVs were static, so that the rise in total cost of senior debt was minimal at just 3bps.

Three countries saw the total cost of senior debt decline:

• In Ireland, senior margins fell from 1.50% to 1.25%, more than offsetting a 13bps rise in the five year Euribor swap rate, so that the total cost of debt fell to 2.04%.
• In Spain, borrowers of senior debt saw a double boost from both rising LTVs (from 60% to 65%) and falling margins, which in falling significantly from 1.80% to 1.25% aligns Madrid more with the likes of Berlin, Paris and London than, say, Lisbon or Rome. The total cost of debt declined from 2.26% to 1.72%.
• In the UK, changes in fortunes were more nuanced and on balance probably saw little decisive shift in favour of either borrower or lender; while senior margins declined from 1.50% to 1.25%, so too did LTVs fall from 60% to 55%.

CBRE’s European Debt Map provides the latest data on commercial property lending terms in 20 countries across the continent. Updated to the end of Q3 2018, it allows lenders and borrowers to critically compare key lending parameters, such as LTV, margin, overall cost of debt and a host of risk measures.