London is the least borrower-friendly location in Europe thanks to low loan-to-value (LTV) ratios for senior loans on prime offices, new CBRE research has revealed.
The typical LTV ratio for a senior loan in London is 55% compared with 70% to 75% in Budapest, the most borrower-friendly capital of the 20 capital cities surveyed.
“In other markets, you can typically borrow at a higher LTV and get a higher proportion of the cost that you need, which means you can make higher returns,” said Dominic Smith, senior director at CBRE Research.
CBRE’s research also found that the gap between the total cost of debt in London and property yields was relatively narrow at 1.2%.
Such yields are making London less attractive to investors than other markets that offer a greater level of surplus income above the cost of servicing debt.
Furthermore, in the development finance market, developers in London face the highest margins in Europe and the second-lowest loan-to-cost (LTC) ratios. CBRE noted that despite low vacancy rates and strong take-up figures, prime office rental values were declining in London, which may be “causing disquiet among lenders”.
“It may just be that lenders in the UK are more accurately reflecting risk than some lenders elsewhere, which may be more beneficial to the market as a whole,” added Smith.
Although London ranked poorly for borrower-friendliness, it ranked highly for lender-friendliness because of the conservative terms being offered.
“It’s the other side of the same coin,” said Smith. “From the lender’s perspective, they are lending at a lower LTV, which gives them more protection.
“For them, things also look a little less risky in London as the LTV is lower and also because the margin is quite good.”
CBRE said that the eastern European capitals of Budapest, Bucharest and Warsaw offered the most attractive conditions for both borrowers and lenders in Europe.