Bank margins in Norwegian real estate financing may have reached a bottom level for now

Average margin among the largest banks in the Norwegian market is now reported to be 204 bps for a 5 year 65% LTV loan. The margin is not expected to go much below this in the next quarters.

Written by Stein Hegdal

The Norwegian real estate broker group UNION has published its quarterly review of interests and loan practice in the Norwegian commercial real estate market. Basis for the review is questions to the seven largest banks in the Norwegian market. The review is generally considered to give a fairly accurate picture of the situation in the market. 

What is the average bank margin now? 

The downward slide in the bank margins seems to come to a halt. The average for a new “standard loan” (within 65% of market value, loan term 5 years, average turnaround of leases 7 years) was 204 bps, just two points below the result in the last quarter. One bank only was below this level. The margin has thus continued to go down from the top in 2017, but is well above the bottom levels of four years ago.

Bank margins for a new standard loan (5yrs, 65 % LTV

Source: UNION

The margin has decreased 41 bps since the top in Q 4 2017. It is 39 bps above the bottom of 165 bps in Q2 2015. Today’s margin is about on the average since 2010.

The average of the lowest margin offered by each of the banks, regardless of loan to value ratio, was 140 bps., with 120 bps reported as being the very lowest the last three months.

What has the term of the loan to say for the margin?

The difference between a three-year loan and a five-year loan is as much as 24 bps on the average. Regulatory capital requirements favour shorter terms, with quite significantly lower margins as a result. We see that the market is responding to this by turning to shorter loan terms.

What is the total interest cost in the Norwegian market?

Long interest rates have fallen since the previous quarter. A five-year swap has gone down 26 bps since then. The total loan cost has thus decreased with 28 bps during the last quarter and is now 3.68%.

Total interest cost for a new standard loan (5yrs, 65 % LTV)

Source: UNION

This is the lowest level the last two years. One must go back to 2015-2016 to find lower total loan costs. (In Q1 2015 the banks’ input gave an average total loan cost of 2.91%.)

UNION expects the present level to be the bottom for now.

The Norwegian Ministry of Finance has proposed some adaptions in capital requirements for banks operating in Norway. The EU regulations will now be included in the EEA-agreement, and will thus apply also in Norway. UNION comments that changes for the larger Norwegian banks are expected to be minor, but the Norwegian branches of foreign banks (Nordea, Danske Bank, Handelsbanken, SEB and Swedbank) may face some additional equity requirements for their loans to Norwegian commercial real estate.