Lending grows despite the lack of property transactions and political risks.
- New loan origination reached £23.3bn for the first six months in 2019, against a low with £21bn 12 months earlier
- Lending margins against prime London offices continue to be under pressure, falling to 196bps in June 2019, especially for international lenders who have been fighting hard for winning transactions, reducing margins in H1 2019 at low LTV levels
- UK bank loan books ending on a high in June 2019
According to the Cass Business School UK Commercial Real Estate Lending Report, authored by Dr Nicole Lux, new lending for H1 2019 was four per cent ahead of volumes reached twelve months earlier, at £23.3bn. Against this Costar recorded £23bn of property transactions over the same period, resulting in £1 of new debt originated for every £1 of property value transacted.
The long-term ten-year average has been 74 pence of new debt per £1 of property value, indicating that most debt originations were the result of refinancing and restructuring activity. As such only 39 per cent of new debt was used to finance property acquisitions, leaving the debt market at the risk of overheating.
Another indicator for some change in market dynamics was seen around secondary loan distribution; while syndications were slow the securitisation market has picked up significantly as an exit strategy. During H1 2019, the securitisation market announced six new UK deals, with another five in the pipeline. However, of the total 4.5bn of transactions, which were securitised, only £3bn were sourced from newly originated loans, the remainder were seasoned loans from 2017- 2018, still making room on balance sheets for new loans.
Outstanding development finance stood still, but undrawn facilities increased to £27bn during the first six months in 2019 from £22bn at year-end 2018. This indicates a further amount of development finance is available for drawdown later this year.
Pricing of loans remains extremely competitive for prime London office properties ranging from 140 – 200bps within the 25th and 75th percentile. Pricing for loans against secondary properties and locations remains 80- 100bps wider than prime, especially loan pricing against secondary retail property remains above those of other asset classes reaching 330 – 600bps for relatively low LTV’s 45 – 55 per cent.
On an annual return basis a five-year fixed rate CRE senior secured loan generated a return of 2.9 per cent compared to a five-year gilt with a return of 0.5 per cent and UK corporate investment bonds at 1.4 – 1.7 per cent in June 2019, which makes it still one of the most attractive investments in the current market. However, some lenders are experiencing pressure on loan performance on loans against secondary retail assets, and correct risk pricing is crucial.
Peter Cosmetatos, Chief Executive of CREFC Europe said:
“Dr Nicole Lux deserves praise for the increasingly sophisticated analysis presented in this research. Unlike the UK commercial property lending market, which is in its sixth year of stability, the research and analysis contained in the Cass report has not stood still.
“This report confirms the growing structural importance of less mainstream lenders. Not only does the research show the outsized role played by Other Lenders (and smaller lenders more generally) in higher LTV lending. It also shows that, with the activity of Insurers and UK and German Banks dominated by refinancing, Other Lenders and smaller lenders (along with Other International Banks) are also providing a disproportionate amount of the acquisition finance available to the market.”
Neil Odom-Haslett, President of the Association of Property Lenders said:
“The first six months of 2019 have been challenging due to a number of reasons, notably, the lack of transactions, the structural changes to the retail sector, the uncertainty that Brexit has bought and many lenders being in “risk-off” mode. Notwithstanding these head winds, real estate lenders have had an incredibly busy first half as they refinance their legacy loan books and reposition some of their retail lending. There has been strong competition at the prime end of the lending market, particularly in central London, with financing opportunities been aggressively priced by some lenders, while at the other end of the spectrum, lending against secondary shopping centres, has proved a bit more tricky and margins have widened.”
Nick Hume, Director at Savills said:
“Lending figures for the first half of 2019 are stronger than anticipated, particularly given that commercial investment transaction volumes over the corresponding period were down by 29.9 per cent. This perhaps demonstrates a continued focus of lending towards refinancing, the main beneficiaries appearing to be the UK Banks, Other Lenders and Insurance Companies. The debt market remains liquid and pricing is competitive, particularly for prime assets in central London.”
Ion Fletcher, Director of Policy (Finance) at the British Property Federation said:
“The bulk of commercial property lending continues to be to assets in London and the south east, reflecting the region’s dynamism versus the rest of the country, but perhaps also reinforcing disparities in economic and social outcomes. To get lending flowing across the country, the government must prioritise extensive investment in physical, digital and skills infrastructure to increase productivity.”