One year after the UK triggered Article 50, the unfolding Brexit saga has had a complex impact on the country’s real estate debt market.
In the wider UK commercial property sector, many have downplayed the ‘Brexit effect’, citing last year’s impressive investment volumes – up by 11.6 percent to a record €72 billion, according to CBRE. While there was a wobble in 2016, it seems the market got back on its feet last year.
The property debt market has continued to function, with lenders taking every opportunity to restate their commitment to the UK. However, lending figures do not tell as positive a story as investment data.
The UK Commercial Property Lending Report formerly run by De Montfort University, now by Cass Business School, has not painted a flattering picture, post-Brexit vote. In 2016, new lending decreased by 17 percent from 2015’s peak lending, the report showed. In the first half of 2017, new loan originations dropped 24 percent to £17.6 billion (€20.2 billion), down from £23 billion in the second half of 2016.
Full-year 2017 figures will be published by Cass later this month, shedding more light on the fortunes of the lending market in Brexit Britain, with last year’s uptick in investment activity possibly reflected in lending volumes.
Recent German bank results, for instance, hint at caution surrounding the UK. Berlin Hyp’s full-year 2017 figures show a drop in UK lending from €380.4 million in 2016 to €191.1 million. Pbb Deutsche Pfandbriefbank said UK new business was “markedly” lower last year, accounting for 13 percent of new lending, from 18 percent in 2016. “We have adopted a more selective stance in the UK, given the uncertainty brought about by Brexit,” it said.
Brexit-related concern among lenders cannot be denied, although there are other reasons for the lending downtrend. The influx of cash-rich Asian investors into the UK has reduced the need for debt finance. This, though, is an indirect consequence of Brexit, with the weak pound attracting overseas investors which continue to see the UK as a fundamentally safe-haven for long-term investments.
Paradoxically, Brexit is part of the reason why some market players are turning their attention to debt. There is evidence of equity-focused players and institutional investors seeking access to the UK market through debt. By lending rather than buying, some are seeking comfort from borrowers’ equity positions, which provide lenders with a risk buffer to market volatility. Allianz Real Estate, for instance, sees debt as the right tool to invest in UK property for the time being – its debt exposure to the country reached around £450 million last year.
Those lenders undeterred by Brexit are benefiting from higher margins in the UK, compared with other established markets in the eurozone. The UK office market, for instance, now offers a risk premium for senior loans of 40 basis points over France, and 50bps compared with Germany, according to CBRE’s latest European Debt Map.
The UK is now halfway through its two-year leaving process and there is more clarity about some crucial aspects of the negotiations – a 21-month transition deal and EU citizens’ rights have been agreed. But as the clock ticks, there is still huge uncertainty. The possibility of a ‘no deal’ scenario cannot be ruled out.
For real estate debt players, Brexit is creating a multi-layered, complex scenario. The Brexit effect is real, but forms only one aspect of European property lenders’ current risk analysis. While overall sentiment towards UK property has improved markedly, lenders would be wise to remember the market is not Brexit-proof.