Lenders continued to capitalise on the extended cycle, loan terms became more conservative, and banks remained dominant; De Montfort University’s 2016 UK CRE lending report provided plenty of food for thought.
The biannual tome on UK commercial property lending produced by Leicester’s De Montfort University provides crucial visibility on a market in which data are scarce. The key findings of the latest edition, covering the whole-year 2016 – the most tumultuous year for property since the financial crisis – were published this morning.
Based on a detailed survey of 77 lending organisations, the report provides hard figures to demonstrate the trends across a significant sample of the UK market. While there is plenty to chew on, 10 points piqued Real Estate Capital’s interest:
1. Lenders touched the brakes, then the gas: Brexit undoubtedly affected the market, with new lending down 17 percent from 2015’s market peak. However, lenders were actually more active post-referendum, with £23.1 billion (€27.4 billion) of the year’s £44.5 billion of new lending written in H2. As investment bounced back, so did lending. In an extended cycle, lenders are determined to deploy debt capital.
2. Banks remained the market leaders: Alternative lenders have made headway in recent years. In 2008, 95 percent of lending was from banks, while, last year, 23 percent was by non-banks. It’s a significant shift, but traditional lenders still dominated; banks and building societies provided £35.4 billion of last year’s £44.5 billion.
3. The cast of characters remained largely unchanged: Only the UK’s banks and building societies and non-insurance alternative lenders grew their market share, and that was only marginally. Insurers and German banks’ share remained unchanged. US and other international banks lost a little market share. The make-up of the market remained fairly similar.
4. Refinancing favoured banks: In 2015, 55.6 percent of finance funded acquisitions. In 2016, 61 percent of business was refinancing, reflecting reduced investment volumes. Refinancing tends to favour those with the largest client bases; the banks.
5. Leverage was dialled back: Lenders were more cautious, with loan-to-values down to below 60 percent on prime property. With so much equity in play, debt levels are lower than in the last cycle. However, yields remain extremely low, and as property values gradually fall, 60 percent can conceivably become 80 percent.
6. Margins picked up: In the second half of the year, margins increased by 10-15 basis points. However, the downward pricing trend had continued to a post-crisis low in mid-2016 and the overall effect for the year was a 25 bps decline for senior loans. Debt remained cheap.
7. Development finance remains scarce: Cautious lenders were reticent to fund development. Only 19 of the 77 organisations provided residential development terms – hardly a good sign for the role real estate finance could play in alleviating the UK’s housing supply crisis.
8. Portfolios were increasingly homogeneous: Regulatory capital treatment favoured core assets and lenders were taking fewer risks. One result is that debt was heavily concentrated on property in London and the south-east of England.
9. The overall debt pile shrank: The total of drawn debt on balance sheets was down 2.1 percent to £164.8 billion. Problem loans were less of an issue, with the value of loans in breach of financial covenants and in default at year-end 2016 down to 3 percent of the aggregate loan book. That had been 7 percent at the end of 2015.
10. 2020 will be interesting: A result of the high level of origination activity in 2015 is that 2020 will be a key year for refinancing activity. With interest rates likely to rise and Brexit to unfold, it is difficult to envisage what kind of market borrowers will face.
A full analysis of the De Montfort Report, as well as a guest feature by its author, the university’s Nicole Lux, can be found in the May edition of Real Estate Capital.