Advisory firm JCRA’s latest report on UK commercial property debt shows increased appetite for higher loan-to-value ratios by non-traditional lenders as they find themselves in a more competitive position in the riskier end of the market. Beyond this key finding, the report reveals several trends shaping lending habits. Here are the ones that piqued Real Estate Capital’s interest.
Lenders ease the brakes. Lending activity fell by 13 percent to £6.3 billion (€6.9 billion) over the 12 months to June. Lower debt transaction volumes came as property investment activity dropped sharply in H1 – down 31 percent year-on-year to €23.4 billion, according to real estate transactions research firm Real Capital Analytics. The slowdown has been widely attributed to caution over Brexit, as well as perceptions of greater risk when it comes to investing in and financing property ten years into the market cycle.
Operational assets are in vogue. Property assets with an operational nature – such as student accommodation or hotels – attracted £3.6 billion of debt over the 12 months to June, which represented a 35 percent increase year-on-year. The surge was fuelled by investors seeking a defensive play and backing assets whose performance is less correlated to the economy and more to structural trends such as increases in the student population or tourism. Lenders are becoming more comfortable with the nature of alternative assets, which still provide higher loan margins than traditional property sectors. According to CBRE data, UK loans at 55-60 percent LTV, for instance, were priced at 2.25-2.75 percent in H1, compared with margins of 1.7 percent for senior debt on prime London offices.
Lenders are still cautious about retail. The sector continues to face pressure from the rise of e-commerce and weak consumer confidence. According to JCRA data, lending to UK retail dropped 85 percent to £193.4 million in the 12 months to June. Market participants say lenders with a significant component of retail on their books – especially high street banks – are unwilling to take on additional exposure to the sector. Meanwhile, those debt providers that still have an appetite for retail are showing signs of caution by underwriting loans at higher prices and insisting on lower leverage ratios. One market source tells us that high street retail, for instance, is attracting financing priced at around 3 percent for LTVs in the range of 50 percent. Twelve months ago, lenders were willing to provide finance to this segment with a margin of 2.75 percent for LTVs ranging 60 percent.
Development finance is on the rise. In the year to June, development financing volumes increased to £1.2 billion from £415 million during the previous 12-month period. As 76 percent of all construction loans in JCRA’s sample were provided by non-traditional lenders, mainly challenger and international banks, this increase could be explained by the greater flexibility in the risk profile of these types of lenders. Investor appetite for construction projects to create value at this late point in the cycle could be also behind the increase in financing in this space.
International banks are determined to provide big loans. International banks – excluding the German banks – wrote £3.7 billion of debt in the UK property market in the 12 months to June, which represented a year-on-year increase of 148 percent. The spike was driven by foreign investment banks’ ability to write large tickets: four of the five largest loans during the period, with a combined value of around £2 billion, were written by these types of lenders. Their appetite for big-ticket financings shows they still have confidence in the originate-to-distribute model for the right transactions in today’s UK market.
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