Under-performing loans still high, but year-on-year lending increases by 50 per cent

Findings from the latest UK Commercial Real Estate Lending report, by Dr Nicole Lux, Senior Research Fellow at Bayes Business School (formerly Cass), indicate a steady yet evident recovery of the lending market during the first half of 2021.

New lending volume for the first half of 2021 reached £23.3 billion – more than at the same point in 2019. This is also helped by a backlog of transactions stuck in the pipeline from 2020 that are now being resolved.

Key highlights from the report, which covers data up to June 2021 also show:

• Development lending made up 20 per cent of new origination in the first half of 2021.
• Margins for prime office loans rose by another 12 basis points (bps) over six months, and 22bps for prime industrial. Loan-to-value (LTV) ratios are, on average, below 56 per cent.
• The only lenders still supporting borrowers with secondary retail asset loans are UK banks.
• Under-performing loans remain at 9.3 per cent of outstanding loan books.

While the first half of 2021 showed a rapid recovery of market activity, borrowers were looking to finalise, restructure and refinance loans that had been on hold during 2020. This accounted for 50 per cent of lending, while the other 50 per cent was new acquisition financing.

Other lenders, primarily including debt funds, were the second strongest lender group after UK banks, providing 24 per cent of new financing in the first half of 2021. Overall, together with insurance companies, which have also doubled their origination volume compared to 12 months ago, these lenders were the strongest originators. German banks have pulled back substantially from the UK lending market given their long-term historic significance.

Lending activity was particularly resurgent among lenders with smaller balance sheets. In the first half of 2020, large balance sheet lenders still held a share of 59 per cent of new origination which fell back to 35 per cent. In the first half of 2021, small to medium-sized balance sheet lenders accounted for 44 per cent of new lending, with 45 per cent of their lending used to refinance loans from other lenders. This shows the market has been resilient and responding to changes in lending activity through different lender groups.

Residential development remained strong in the first half of the year as well, accounting for 12 per cent of total origination. Despite strong competition for residential lending, loan pricing average margins have become more volatile and appear to have increased by 15bps for development and 32bps for investment loans due to the wide range of different lender groups offering loans.

Non- or under-performing loans accounted for 9.3 per cent of loan books, with lenders working through this vulnerability. Overall market leverage has been reduced, and banks in particular have scaled back their outstanding loan books to commercial real estate debt. On the other hand, issuance of unsecured bonds by property companies and commercial mortgage-backed securities (CMBS) bond issuance have picked up.

Report author, Dr Nicole Lux, Senior Research Fellow at Bayes Business School (formerly Cass), said:

“It is interesting to see the market bouncing back so quickly at the start of 2021, despite lenders still addressing loan defaults and covenant breaches as well as changes to the new Sonia rate.

“After a couple of difficult years for the lending market, new lending has been resilient and I would expect and hope that remains the case as global economies open up once more."

On Monday 6^th September, the Business School (formerly Cass) became Bayes Business School. Read the University’s statement about the new name.

Find out more about the Real Estate Research Centre at Bayes Business School.

Read about the MSc Real Estate programme at Bayes Business School.