New lending to UK commercial real estate during the first half of 2016 was down 13 percent year-on-year, reflecting the slowdown in investment activity across the market, the latest De Montfort University report on commercial property lending shows.
In total, £21.4 billion of new loan origination, including refinancing, was recorded; down from £24.7 billion in the first half of 2015. The H1 2016 volume was down from £29 billion done in the preceding six month period.
“The reduction in new loan originations and activity reflects the general market slowdown we have seen so far this year. Uncertainty ahead of the EU Referendum may have played a part, but there were signs that the property market was cooling off anyway,” said Ion Fletcher, director of policy (finance) at the British Property Federation.
Traditional lenders, the banks and building societies, remained the most significant providers of debt for UK real estate. Collectively, they originated £17.6 billion of loans. Insurance companies wrote £2 billion, while other non-bank lenders – including debt funds and asset managers – accounted for £1.8 billion during the period.
UK banks and building societies increased their share of new business from 34 percent at the end of 2015 to 44 percent at mid-year 2016. Meanwhile, North American banks’ share of new origination fell from 14 percent to 7 percent and insurers’ share fell from 16 percent to 10 percent.
“What is really striking is the way UK banks and building societies recovered market share in origination as North American banks and insurers, in particular, held back during the first half of the year,” commented Peter Cosmetatos, chief executive of CREFC Europe.
New lending volumes were down across most lender types, year-on-year. UK banks and building societies’ new lending was down 2 percent between H1 2015 and H1 2016, while North American banks saw a 35 percent drop, insurance companies saw a 42 percent drop and other non-bank lenders saw a 27 percent drop. German banks, however, increased origination by 13 percent year-on-year.
Refinancing activity accounted for 51 percent of new lending; a shift from year-end 2015 when the majority of business (55.6 percent) financed acquisitions.
Syndication activity dropped, the report showed. During H1 2016, around £1.3 billion of debt was reported as being syndicated, just 14 percent of the volume of syndicated debt recorded over the whole of 2015. However, around £4.8 billion was reported as the value of participations in club deals in the first half of the year.
“What is more apparent now is that warehousing risk on balance sheet for investment banks, typically North American, has become more difficult in 2016 without smooth functioning distribution channels such as CMBS or perhaps more liquid syndication to international lenders. The velocity of capital has slowed and evidenced by larger clubs with take and hold positions for primary underwriting lenders and the investment banks are taking less risk,” commented Chris Holmes, EMEA head of debt advisory at JLL.
Despite lower levels of origination in H1 2016, the overall volume of debt secured by UK commercial property continued to grow during the half-year. The aggregated value of outstanding drawn debt stood at £173.4 billion, up 3 percent from the end of last year. The authors noted that £22 billion of loans were committed but not yet drawn at the end of 2015, possibly contributing to the H1 increase.
A significant majority of drawn UK real estate debt, 77 percent, remains in the hands of banks and building societies. Insurers held 15 percent, while other non-bank lenders held 8 percent. Of the banks’ share, UK banks and building societies held 46 percent of outstanding debt retained on balance sheet, while German banks held 11 percent, North American lenders 7 percent, and other international banks 13 percent.
The UK banks and building societies grew their proportion of the overall loan book by 5 percent during the six month period; their largest increase since the Global Financial Crisis. Non-bank lenders, excluding the insurers, grew their proportion of the book by 22 percent.
Looking forward, however, fewer organisations intend to grow their portfolios. At the end of 2015, 83 percent of lenders polled by De Montfort said that they were aiming to increase their total loan book size, although that figure fell to 75 percent at the end of H1 2016. The majority, 69 percent, of lenders did though intend to increase their loan origination activity during the second half of 2016.
The report gathered information from 78 organisations. Taking into consideration sources of information outside its sample, including financial statements, UK property debt held by Ireland’s NAMA and outstanding CMBS loans, De Montfort estimated the total scale of the UK’s CRE debt pile to be £215.7 billion. That figure was up from the £211.6 billion estimate calculated at the end of last year.
Leverage was generally down across the UK loan book. At the end of H1 2016, 89 percent of debt fell below 70 percent loan-to-value, up from 87.5 percent at the end of 2015. The value of loans in breach of financial covenants and in default at the mid-year point was around £4.5 billion, just 2.6 percent of the loan book. This compared to £10.4 billion (7 percent) at the end of 2015. Lenders generally commented that all problems related to pre-2009 loans.
Margins continued to decline, although the report took into account pre-referendum origination. Prime office margins for senior debt came in by 31 basis points (bps) to 191 bps during the half-year, the report said. German banks offered the most competitive pricing on senior loans for prime offices, at 162 bps, an increase of 23 bps from the end of 2015. UK banks and building societies dropped their pricing from 217 bps to 195 bps over the six months for senior loans on prime offices.
De Montfort showed a clear distinction between prime and secondary property loans, with fewer lenders willing to quote margins for secondary property. The average senior margin for secondary offices, retail and industrial ranged from 279-305 bps.
The overall average LTV ratio for deals during the first half of 2016 was 59 percent for senior prime offices. UK banks and building societies reduced their average LTV from 65.6 percent to 59 percent.
A total of 11 lenders provided data for fully pre-let development finance, down from 21 lenders at the end of 2015. The average margin was 348 bps, up from 339 bps. Only five lenders provided terms for speculative development finance, with an average margin of 513 bps and loan-to-cost ratio of 56 percent.
“The lack of funding for development remains a problem, and the report also suggests that lenders are lending against a narrower range of property than in the past, which suggests that recent regulatory changes may inadvertently be driving concentration risk among lenders,” said the BPF’s Fletcher.
The De Montfort report has been published since 1999. This was the first edition to be led by former Deutsche Bank banker Nicole Lux, who took over the report from Bill Maxted and Trudi Porter.
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