Commercial real estate lenders originated 27 percent more debt in the UK during the first half of 2018 than in H1 2017 – the first increase in new lending since 2016, according to the latest Cass Business School UK commercial property lending market survey.
Despite the ongoing political uncertainty, with just five months until the UK is due to leave the European Union, debt providers originated £22.5 billion (€25.7 billion) during the first six months of the year, of which 53 percent came from new acquisition financing.
Lenders with balance sheets ranging from £1 billion to £5 billion were the most active group, responsible for 45 percent of new financing, while seven out of the 12 most active originators were UK banks, with the other two being non-bank lenders, according to the survey, which now offers loan portfolio benchmarking to all lenders.
While, in H1 2017, lenders struggled to keep pace amid an equity-driven investment market with new lending volumes down by 24 percent, deal activity during the same period a year later brought higher volumes of business opportunities in the debt space.
“Originations are highly correlated with property transactions, and H1 2018 has been quite busy,” Nicole Lux, author of the Cass UK Commercial Real Estate Lending Report, told Real Estate Capital. “Borrowers are also trying to refinance prior to Brexit, so I don’t think the upward lending trend will stop, we will see a very busy Q4 2018,” she added.
Boosted by institutional capital, the UK commercial real estate investment market performed well in H1 2018, with volumes standing at £26.9 billion, according to Savills. This is the fifth consecutive year of above-average first-half volumes, with H1 2018 being almost 32 percent higher than the long-term average. Compared with H1 2017, however, lending volumes were slightly down by 1 percent.
While loan-to-value ratios remained conservative, with an average of 58 percent, high competition for prime office assets, particularly in London, has driven senior margins further down – to 194 basis points, from an average of 203bps recorded in 2017.
“Lenders are more cautious about the late cycle and rather lower LTV, but pricing is very competitive,” Lux said, adding that she expects margins to continue under pressure “on the very prime end” of the market. On secondary assets, spreads across sectors have almost disappeared, as retail margins continue to drift out. “Secondary retail and office are difficult to finance, but lenders, rather than not financing these segments, are increasing margins to unattractive levels if they don’t want to finance a transaction.”
Of the £22.5 billion of newly originated loans, 61 percent targeted London and the South East, while 14 percent financed portfolio transactions across several regions. Fewer lenders were financing transactions of single properties in specific regional locations. However, UK banks and building societies dedicated 52 percent of their lending to the UK regions.
The amount of undrawn development facilities remains high with £30.6 billion, while sales and completions of new-build residential have decreased, according to the report. “We are about to see a slowdown in development finance as residential development sales have been slowing. High land prices in some areas make new construction impossible, considering the land acquisition is typically not financed by the bank,” Lux noted.
The UK’s total outstanding loan book decreased by almost 1 percent to £163 billion, which suggests lenders are replacing their maturing loans with new lending rather than expanding their books significantly. “The first half of the year has been one of caution amongst lenders and borrowers alike,” said Neil Odom-Haslett, president of the Association of Property Lenders.
Property fundamentals in the current market cycle, Brexit and the interest rate drift are among the issues that concern financiers the most, according to surveyed lenders.