De Montfort: New loan origination hits post-crisis high

The total value of new commercial real estate loan origination hit a post-crisis high last year as lenders wrote £53.7 billion of new finance, according to the latest De Montfort Commercial Property Lending Report.

The total value of new commercial real estate loan origination hit a post-crisis high last year as lenders wrote £53.7 billion of new finance, according to the latest De Montfort Commercial Property Lending Report.

de montfort logoLast year’s total loan origination was up from £45.2 billion in 2014, according to the biannual report. While new lending volumes increased, the proportionate increase moderated to 18.8 percent from a 2014-15 post-crisis record 51.2 percent.

The findings demonstrate a return of confidence to the CRE lending market as the value of distressed and defaulted loans continues to fall, the authors said.

The total amount of outstanding debt at the end of 2015 was £168.4 billion, representing a 1.9 percent increase from £165.2 billion at the end of 2014 and the first increase in the overall size of the UK CRE debt pile recorded since 2008.

The value of distressed loans – those in default and in breach of financial covenant – almost halved during 2015. At year-end 2015, the value of distressed loans reported to the research was £12.1 billion, compared to £23.2 billion a year earlier and £47.6 billion at the end of 2009.

Loan-to-value (LTV) ratios on existing loans continued to fall, reflecting the rise in commercial property values and banks continuing to lend on similar terms to recent years. At year-end 2015, 87.5 percent (£123.5 billion) of outstanding debt had a LTV ratio of 70 percent or less, compared to 77 percent (£107 billion) at year-end 2014 and 63 percent (£99 billion) at year-end 2013.

Outstanding debt with a LTV between 71 percent and 100 percent represented 7.5 percent (£10.6 billion) of the market, and just 5 percent (£6.9 billion) had an LTV greater than 101 percent. Average lending LTVs fell during the course of 2015 for all sub-sectors.

UK banks and building societies saw their market share continue to decline, although they still dominated the market. That group of lenders represented 34 percent of new loan originations at the end of 2015, the lowest level ever recorded by the research, compared to 39 percent the previous year. The proportion of outstanding debt held on their books also fell, from 49 percent of the total at year-end 2014 to 45.5 percent in 2015.

For the first time, insurance companies were the second largest category of new loan originators, representing 16 percent (£8.57 billion) of the total in 2015. The exposures of insurance companies now account for 15.1 percent (£25.4 billion) of the market, compared to 12.7 percent (£21 billion) in 2014.

Central London continued to dominate activity. Of the total outstanding debt, 43 percent is secured against real estate in the capital city, the highest result ever recorded by the research, and a dramatic increase from the 26 percent recorded in 2010.

Despite an overall increase in loan origination, the value of new development finance fell from £2.4 billion in 2014, to £2.25 billion in 2015. Banks, building societies and insurance companies increased their loan origination for commercial development projects from £1.57 billion in 2014 to £1.95 billion in 2015, but non-bank lenders saw a decline, from £800 million in 2014 to £300 million in 2015.

Nicole Lux, who is DMU's new senior research fellow in Commercial Property and Lending
Nicole Lux, who is DMU’s new senior research fellow in Commercial Property and Lending

The research highlighted the change in the loan distribution market. Securitisation remains in the doldrums, while the syndication market continued to grow. The value of loans syndicated roughly doubled for the second year running to £9.2 billion, up from £4.7 billion in 2014 and £2.1 billion in 2013. There were also marked increases in the numbers of respondents syndicating and participating in syndications, to 20 (from 12) and 28 (from 24) respectively.

The report also demonstrated lenders’ preference for large-ticket lending. Only fourteen banks, building societies and insurance companies (30 percent of the sample) were prepared to write a loan of £5 million or less for commercial investment projects, compared to thirty one (67 percent) for £100 million and above.

“The fall in value of distressed loans to very low levels coupled with a gradual increase in new loan originations hints at a robust and stable commercial property lending market. It will be interesting to see whether commercial real estate lending accelerates from here or grows in a more measured way,” said Ion Fletcher, director of policy for finance at the British Property Federation.

“Given growing investor interest in the regions over the course of 2015 and the government’s efforts to devolve greater powers to local areas, it is perhaps surprising that lenders show such a strong preference for central London. Lenders also remain reluctant to lend at small ticket sizes, which raises questions about how smaller regional projects can access the finance they need to succeed,” Fletcher added.

Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council (CREFC) Europe, said: “The report confirms that in terms of fundamentals, sentiment and discipline, the market was in a good place coming into 2016 and the uncertainty provoked by the EU referendum.

“At a more structural level, the transformation of the loan distribution market is striking. North American banks that would traditionally have favoured securitisation are establishing themselves as a syndication powerhouse, almost certainly influenced by a combination of commercial and regulatory factors. This lender category was the only one to report syndicating more in 2015 than in 2014, accounting for well over half of the total value of loans syndicated,” Cosmetatos added.

Tim Crossley-Smith, national head of valuation consultancy at Bilfinger GVA, added: “With average loan to value ratios standing at lower levels than the end of 2014 and interest cover ratios increasing over the year, lenders are demonstrating a disciplined approach to changing circumstances, whilst the survey reassuringly confirms their long term commitment to the commercial real estate sector.”

The De Montfort report, which has been published since 1999, is the most comprehensive study of the UK’s commercial property lending market. The latest edition is the last to be compiled by authors Bill Maxted and Trudi Porter, and the first to be co-authored by former Deutsche Bank banker Nicole Lux, who will take over the report.