While commercial real estate lenders expressed confidence at the start of 2018 about providing loans in the UK market despite political uncertainty, the country’s impending exit from the European Union is likely to have a greater bearing on sentiment at the start of this year, the Real Estate Finance unit of Link Asset Services expects.
The firm, which has launched its third survey of the UK real estate finance market, expects banks to be more cautious coming into 2019 as Brexit plays out, with well-capitalised non-bank lenders profiting.
The survey, which is open until 31 January, can be found here. It will gauge sentiment among lenders and explore the terms on which they are prepared to provide loans. Real Estate Capital will publish analysis of the results in March.
Below, James Wright, head of real estate finance at Link, explains three trends he expects to be reflected in the survey results.
1. Brexit will impact lending appetites: Our 2018 survey demonstrated strong lender confidence. It will be interesting to see whether that same confidence is expressed this time around, given the current political environment. I expect more caution on leverage among the banks. German lenders will be particularly concerned about lending in the UK and we have seen many already stop lending here for the time being. Towards the end of 2018, we noticed banks become more conservative on leverage as it became apparent that a no-deal Brexit remains a very real possibility. Meanwhile, debt funds and other alternative lenders have raised capital and need to deploy.
2. Pricing for riskier business will rise further: Last year’s survey showed debt providers converged in the senior space as alternative lenders encroached further into traditional bank territory. In recent deals where we have sourced both senior and junior debt, sourcing well-priced senior has been notably easier than mezzanine, for which pricing has elevated through to the end of the year. Across the market, the divergence between senior and mezzanine pricing is at its widest since 2007. Whole loan providers are wise to this and we would expect them to raise their pricing for 2019.
3. Borrowers will continue to seek long loans: Last year, we saw a decrease in lender preference for providing loans of five years or less and an increased preference for loans of six years or more. This is partly due to more long-term, fixed-rate lenders aiming to match liabilities. However, Cass Business School data have so far showed this is not necessarily resulting in a dramatic shift in the tenor of loans actually provided in the UK. With gilt-linked financing at historic lows, the case for sponsors to lock in on core portfolios is still strong and we expect this trend to continue.