De Montfort: UK CRE lending dropped 17% in 2016

Commercial real estate lenders originated 17 percent less debt in the UK in 2016 than in the previous year, the latest lending market survey by Leicester’s De Montfort University shows.

As the UK’s vote to leave the European Union impacted the property investment market, lending volumes were down from the post-crisis peak in 2015. In total, £44.5 billion of new loan originations were completed in 2016, the university’s Year-End 2016 Commercial Property Lending Report showed.

Despite the pause after the referendum result, the market rebounded during the second half of 2016, which with £23.1 billion of loan origination was slightly more active than the first six months. Reflecting the shift away from investment activity in the market, 61 percent of deal-flow during 2016 was refinancing; a shift from 2015 during which 55.6 percent of debt issued financed acquisitions.

Banks and building societies remained the most prolific lenders, accounting for £35.4 billion of last year’s new business. Insurance lenders accounted for £4.6 billion, while other types of non-bank lenders provided the remaining £4.4 billion.

Overall, the report noted, the UK commercial real estate debt market remains liquid, with competitive pricing and lending terms for prime property. However, lenders’ increased caution was reflected in lending terms.

Margins had been falling since 2012 and they reached a post-crisis low in mid-year 2016. However, there was upward pressure on pricing during the second half of the year, with an increase of 10-15 basis points on loans secured by prime property. The overall effect, however, was a 25 bps decline in average senior loan margins for loans on prime properties, from 223 bps to 198 bps over the year. For senior loans secured by secondary offices, average margins remained stable at 263 bps by the end of 2016.

Across the sample, leverage dropped during the year. Average LTV provided by UK banks and building societies was 59 percent, compared with 65.6 percent at the end of 2015. Average maximum senior loan LTVs for secondary property fell below 60 percent for office, retail and industrial properties. The average maximum LTV for mezzanine finance was 75-85 percent.

The De Montfort report also polled lenders on terms offered for development finance. Of the 20 organisations that disclosed such details, the average margin for fully pre-let commercial development finance was 401 bps, up from 339 bps during the year. The average loan-to-cost ratio, based on gross development value, was 69 percent and the average arrangement fee 125 bps.

UK loan pile

The total UK commercial property debt pile shrank slightly during 2016, with De Montfort recording a 2.1 percent drop in drawn debt to £164.8 billion across its sample. Including drawn and undrawn debt, the total remained stable at £191.5 billion.

Of the total of drawn debt (£164.8 billion), 77.35 percent was held by banks and building societies, 14.7 percent by insurance companies and 8 percent by other non-bank lenders. Junior and mezzanine lending represented 2.1 percent of outstanding loans, of which 76 percent was held by other non-bank lenders. In absolute terms, only UK bank and building societies and other non-bank lenders increased their total book value.

There were though no significant changes in market share among the various categories of lenders during 2016. Other non-bank lenders grew their market share of the UK loan book from 7 percent to 8 percent, while UK banks and building societies also grew their share by 1 percent. Insurance lenders and German banks’ share remained unchanged, while North American banks and other international banks lost 1 percent of the market.

The report also estimated the total size of the outstanding UK commercial property lending market, including lending outside of the sample. Including £26.7 billion on the financial statements of listed firms, plus £1.1 billion of UK-secured debt held by Ireland’s National Asset Management Agency and £17.1 billion of outstanding UK CMBS, the total was estimated at £208.7 billion, which was down 1.5 percent over the year.

Now in its 20th year, the De Montfort report, compiled by former Deutsche Bank banker Nicole Lux, is the most comprehensive survey of real estate lenders in the UK market. In total, 77 lending organisations contributed, five more than in the previous survey.

“The apparent stability of the lending market masks a couple of underlying trends that could be important from a policy perspective; namely the continued rise of debt secured against London property – which now represents almost half of the outstanding total – and the continued relative dearth and high cost of development finance,” noted Ion Fletcher, director of finance policy at the British Property Federation, a sponsor of the report.

Standard Life’s Neil Odom-Haslett, president of the Association of Property Lenders, which also sponsors the report, added that lenders have clearly become more cautious: “The bias towards lending in London and the South East continues, and development finance remains scarce, and this will not change in the short term – unless of course the regulators and policymakers intervene in some way.”