Cass UK Commercial Real Estate Lending Report reveals sharp decrease in lending and forecasts a rise in defaulted loans as lending margins increase and the economic consequences of coronavirus play out.
Published (Updated )
The latest Cass Business School UK Commercial Real Estate Lending Report and associated analysis suggest that the coronavirus pandemic will add to a range of challenges facing an already slowing market.
Key findings from the report show that:
- New loan origination reached £43.8 billion in 2019 – a 12 per cent decline from 2018, in line with property investment volumes.
- Lending margins significantly reduced across secondary property types.
- The absolute amount of defaulted loans year-on-year increased by 36 per cent.
Rising defaults are likely to affect lending secured on retail property. Development loans are particularly expected to add to banks’ costs as they adapt to steadily rising capital requirements under the Basel framework.
The report for year-end 2019 takes the current coronavirus crisis into account and anticipates further loan write-offs and debt losses for the retail sector of between £8 billion and £10 billion. An additional £22 billion of development loans are affected by construction delays and defaults of construction contracts, with £14 billion of residential development loans also potentially being partially written-off.
Author of the report, Dr Nicole Lux, Senior Research Fellow at Cass Business School said:
“While there was no evidence of lenders increasing costs to recover losses and write-offs after the crisis of 2008/09, the situation could now be different. The underlying credit decline of loans could immediately trigger increased capital costs where a recovery of a loan over the long-term is questionable. This then could result in higher lending margins.
“The effect of the coronavirus crisis will be most felt by the already struggling retail sector, but other sectors such as hotels and leisure, student housing and residential investment property will be greatly affected."
“While the change in capital treatment for interest on loans during coronavirus will offer short-term relief, some businesses will not recover in the long term and the losses of these loans will need to be reflected in banks’ balance sheets.”
Against a 12 per cent year-on-year decline in lending, CoStar recorded £48 billion of property transactions over the same period. Just 46 per cent of new debt was used to finance property acquisitions, with all other lending due to refinancing. While property transactions are likely to be subdued in 2020 with an expected transaction volume of £34 billion, lenders must refinance £43 billion worth of loans in 2020/21.
Outstanding development finance remained stable in 2019, but undrawn facilities increased to £27 billion in the first half of 2019 and remained high at £25.5 billion, indicating that a significant amount of development came to a standstill during this time.
While pricing of loans secured by London prime office property remains competitive, there is a visible increase from 199 basis points to 205 basis points across 12 months. Interest rates developed favourably during 2019 to relieve some of the pressure, but larger increases are seen across secondary property loans ranging from 40 to 70 basis points, ending at more than 300 basis points for all type of properties.
Purchase a copy of the Cass UK Commercial Real Estate Lending Report here.