The latest UK Commercial Property Lending Report, published by Cass Business School at the City University of London, shows the country’s debt market to have been resilient in 2018. Lending activity increased on the previous year, notwithstanding the market’s concerns over Brexit. Here are the top takeaways that piqued Real Estate Capital’s interest.

1. The lending market was buoyant, even though investment was down: Real estate lending activity stepped up towards the end of the year, with total origination reaching £49.6 billion (€57.7 billion), an increase of 12 percent on 2017. The report’s author, Nicole Lux, linked the increase to strong investment flows in 2017 – which were up 11.6 percent year-on-year to £72 billion, according to CBRE – as debt supply usually lags borrower demand by one year. However, investors’ caution over Brexit had an impact on investment volumes in 2018, which dropped by 6.5 percent to £65 billion. The next Cass survey, reflecting lending volumes in the first half of 2019, will shed light on whether the debt market last year was just catching up.

2. German lenders have backed away from the UK: German banks were the least active real estate lenders in the UK, having originated £4.6 billion – a decrease of 19 percent compared with 2017. The report notes concerns over lending amid the unfolding Brexit drama, with German players pausing their lending activity towards the end of the year. Pfandbrief banks, in particular, have been awaiting legal changes so that, post-Brexit, UK real estate loans will be eligible for funding through the German covered bond market. To the relief of German banks, the legal amendment to safeguard the eligibility of UK loans in Pfandbrief pools passed into law last month.

3. Residential development financing fell: The struggle to finance build-to-rent projects across the UK had an impact on lending volumes for residential developments, which fell by £1 billion to £5.2 billion. Figures from Savills showed the number of BTR homes under construction in the UK to have increased by 40 percent to more than 43,000 units. However, the difficulty in underwriting volatility in projected rental incomes as well as the lack of sales of completed and operational BTR properties are discouraging lenders from backing these projects.

4. Lenders are reducing their exposure to retail: With falling property values on the back of structural changes in the market, outstanding loans to the retail sector dropped from 20 percent of the total loan book in 2017 to 15 percent in 2018. The risk premium for financing assets from the struggling sector was reflected in the average loan pricing for secondary assets, which rose by 42 basis points to 334bps. In terms of loan-to-value ratios, average levels stood at 57 percent for prime and 56 percent for secondary assets. However, market participants have already said retail loans are likely to be written well below the 50 percent mark in upcoming deals.

5. Lenders remain cautious: Eighty percent of the facilities in the UK’s £173 billion outstanding loan book had LTV ratios of 60 percent or lower (compared with the 80 percent LTVs agreed before the global financial crisis on loans for senior prime assets). This partly reflects a market that is learning lessons from the recent past. However, the report’s authors also attributed the increased caution to regulatory pressures on bank lenders through international Basel standards and the UK’s more stringent slotting rules, which require higher capital reserves against loans with LTV ratios of above 50 percent.

Email the author: alicia.v@peimedia.com