Cass: Second-half rally boosted 2017’s UK lending volumes

A rebound in commercial property lending during H2 2017 put last year’s figures on a par with 2016.

The volume of debt originated by commercial real estate lenders in the UK during 2017 remained steady compared with the previous year, according to Cass Business School’s first UK lending market survey – which it took over from De Montfort University.

Despite a 24 percent drop in lending activity year-on-year during the first half of 2017, with £17.6 billion (€20.2 billion) of new origination, a much busier second half added another £26.8 billion, which boosted last year’s total new origination to £44.5 billion, almost exactly in line with 2016’s total.

The boost in financing activity during the second half of 2017 followed an upturn in investment activity in the UK throughout the year. Investment was up 11.6 percent to €72 billion from 2016 according to CBRE data.

“Lending volumes picked up particularly between October and December, which was in line with a higher number of investment transactions seen in the second half of last year,” says Nicole Lux, author of the Cass UK Commercial Real Estate Lending Report.

“At the same time, a higher number of refinancing deals took place towards the end of the year, as borrowers became more aware that interest rates could go up in 2018,” she adds.

Almost half of origination volumes in 2017 financed new acquisitions, with refinancing still accounting for a slim majority of business, at 51 percent. However, there was some reversal of 2016’s trend, when refinancing totalled 61 percent of business.

The Cass report highlights that last year’s total origination volumes are “slightly understated” by an additional £34.5 billion of undrawn commitments, which are mostly linked to development finance, a type of funding that is “clearly on an upwards cycle” and is expected to continue to grow in 2018.

Following years of scarcity of development finance, new debt allocated to construction projects totalled £8.7 billion last year, representing a 13 percent increase on 2016. Most of this finance was allocated to residential schemes, with UK banks and building societies providing the bulk of new development finance, the survey notes.

“Lenders are keen to finance developments in London. While office space in the City is at its peak, lenders are finding potential outside this area, especially in residential spots with good commuting links,” Lux argues.

“We have seen enormous interest in build-to-rent among lenders, so the popularity of residential development is no surprise,” adds Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council Europe.

Last year’s uptick in undrawn facilities – up by 29.7 percent on 2016 – nudged up total committed real estate debt by 4 percent to £199 billion, year-on-year. The UK’s total outstanding loan book, however, remained stable at £164.5 billion, which indicates lenders are replacing their maturing loans with new lending but not expanding significantly.


The UK property lending market is “highly diversified”, with 76 active lenders during 2017, the report shows. Banks and building societies remained the main lending group, having generated £34.2 billion of last year’s new business. Insurers provided £4.3 billion, while other types of non-bank lenders accounted for the remaining £6 billion.

Non-bank lenders increased their market share of new origination to 14 percent, from 10 percent the previous year. This increase in new lending activity is linked to the expanding universe of non-bank lenders reporting to the Cass survey or launching new debt funds, the report says.

“The proliferation of new debt funds will continue as long as they can raise money from investors seeking attractive returns,” Lux notes.

Investors remain keen on real estate debt, according to Real Estate Capital data. Increased investor demand for debt fuelled more than $10 billion of fundraising for private real estate debt vehicles focused on Europe.


Meanwhile, liquidity in the UK commercial real estate debt market remains “strong”, the report notes, with competitive pricing and lending terms for prime property. In 2017, lenders priced senior loans secured by prime offices at an average of 203 basis points, which compares with 198bps in 2016.

“We are talking about 5bps difference, this is minimal,” Lux says. “Going forward, I see stable margins more than an upwards trend in pricing. For retail, however, lenders made a conscious choice to increase margins and lower loan-to-values, because of the transitional period in retail.”

Overall, lenders reported margin pressure for loans provided at conservative LTV levels – the average margin on loans of up to 60 percent LTV was 188bps. Debt providers, however, tried to maintain pricing levels whenever possible. Loan margins against secondary properties were significantly higher with an average margin of 293bps for secondary offices, 285bps for secondary retail and 296bps for secondary industrial loans.

The Cass report also polled lenders on terms offered for development finance. Of the 26 organisations that disclosed such details, the average margin for fully pre-let commercial development finance was 447bps, an increase of 46bps from 2016. The average loan-to-cost ratio, based on gross development value, was 69 percent and the average arrangement fee 133bps.


Although the report noted increasing requests from lenders for higher leverage loans in order to take equity out of deals, lenders – particularly banks – have resisted raising LTVs.

Across the sample, average LTV ratios remained low, with 78 percent of the total outstanding loan book held in loans with LTV ratios below 60 percent. The highest average leverage was reported by insurance companies with 61 percent and the lowest by German banks with 56 percent.

Surveyed lenders frequently argued that the lending market, together with the underlying property investment market, is considered to have reached its peak, but while interest rates remain low, property markets will remain buoyant.

Any potential risk is expected to come from an interest-rate rise, which will have an impact on debt servicing levels for unhedged floating-rate loans – currently accounting for £28 billion, or 18 percent of the total debt books.

In addition to a potential interest-rate rise, bank lenders are increasingly concerned about the changes in office-occupier markets and retail markets. Their lending criteria and risk models traditionally rely on long-term income and are taking time to respond to these changes, the report adds.