Placepoint

Loan-to-value ratio

The loan-to-value ratio is the relationship between debt and market value for a building, expressed as a percentage. A building valued at NOK 500 million with NOK 325 million in mortgage-secured debt has a loan-to-value ratio of 65%. The bank and the buyer use the figure to assess financing risk: the higher the leverage, the more sensitive the equity becomes to falling values and interest rate changes.

In Norwegian commercial property, initial financing is typically 50-70% loan-to-value, depending on the building category, the tenant profile and the lease length. Banks often set a loan condition (covenant) requiring that the loan-to-value ratio does not exceed an agreed level (for example a maximum of 75% through the loan period). If the covenant is breached, the bank can require an equity injection, refinancing or, as a last resort, enforcement of the security. The market in 2022-2023 gave several examples of this, when yield expansion lowered values and loan-to-value ratios grew past the covenants without the borrower having done anything wrong.

The calculation requires an up-to-date market value, and that is where the measure often becomes disputed. Valuations from brokerages and appraisers can vary; different models (direct capitalisation rate versus discounted cash flow) give different answers. Banks in Norway typically buy an independent valuation at least once a year, more often on refinancing or a covenant breach. The figures are based on actual rent, not asking rents, and the assumptions must stand up to stress testing.

The loan-to-value ratio must always be read together with the debt service coverage ratio. A building with a 70% loan-to-value ratio and a 1.8x debt service coverage ratio is safely financed; a building with a 55% loan-to-value ratio and a 1.1x debt service coverage ratio is on the tipping point of a covenant breach if the rent slips or rates rise. The bank often sets both covenants at the same time; a breach of either the value or the cash flow level triggers the same right to renegotiate.

The term is also used in aggregate at portfolio and company level. A property company or fund typically reports an average loan-to-value ratio across the whole portfolio, but individual buildings can carry significantly higher or lower leverage. Investors should read both the average and the spread, not just the single figure.

In Placepoint you can compare market value, tenants and contract rent from the property panel when you assess the loan-to-value ratio and its serviceability in a financing application or due diligence. Report: Portfolio draws the same line: the loan-to-value ratio is a figure only the owner has, not something that follows from the property's own register information.

How it looks in Placepoint

In Placepoint you find this in Property panel - Units and Tenants:

Loan-to-value ratio in Placepoint

From Placepoint's glossary: Loan-to-value ratio

More information: Finanstilsynet: Commercial property, Norges Bank: Financial stability, Store norske leksikon: borrowing against property

Norwegian: belåningsgrad.

Common questions we come across

What is a typical loan-to-value ratio for Norwegian commercial property?

Initial financing is typically 50-70%, depending on the building category, the tenant profile and the lease length. A new building with a state tenant on a 12-year lease can be financed up to around 75%; an older office building with a short remaining lease term sits lower.

What is a covenant and what happens if it is breached?

A covenant is a loan clause that sets limits for the loan-to-value ratio and/or the debt service coverage ratio. If it is breached, the bank can require an equity injection, refinancing, or as a last resort enforcement of the security. Breaches typically happen because the market value falls (yield expansion) or because rental income slips.

How often is the loan-to-value ratio recalculated?

Banks in Norway typically buy an independent valuation at least annually, more often on refinancing, a sale, a covenant breach or larger market movements. Between valuations, the level is tracked through internal stress tests and quarterly yield reports.

What is the difference between loan-to-value ratio and equity ratio?

The loan-to-value ratio applies to one building or one property: debt divided by market value. The equity ratio applies to a company or a group: equity divided by total assets. A property company can have both a building LTV (per property, set by the bank) and a group LTV (the average across the portfolio).