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Link survey: Lenders expect to increase UK loan originations in 2021

According to the advisor’s fifth UK debt survey, lenders are gearing up for a recovery but remain cautious about market conditions.


Almost two-thirds of real estate lenders in the UK expect to increase their property financing activity in 2021, according to the results of the fifth annual Market Trend Analysis survey, published by the real estate debt advisory business of consultancy Link Asset Services.

Link surveyed 61 lending organisations on their outlook for the UK property lending market in 2021. The results indicate that many are gearing up to take advantage of a recovery in the market but remain concerned about the pandemic’s impact on property sectors and the wider UK economy.

Below are key findings from the survey.

Lenders expect to lend more

In Link’s 2020 survey, conducted in January, before the covid-19 pandemic, 82 percent of lender respondents expected to increase originations – although the pandemic undoubtedly derailed most lenders’ plans. In the 2021 survey, 64 percent said they expect an increase – a smaller proportion than in 2020, but a significant response given the reduction in lending activity caused by the pandemic last year.

Tim Schuy, head of real estate finance at Link Group, told Real Estate Capital: “There is opportunity still and people are bullish about it. Risk is harder to price and so some have taken a step back. But it is not a permanent step back. Everybody we spoke to is ready and gearing up for the recovery, including the UK clearing banks.”

However, the survey shows there is also continued caution among lenders with 55 percent expecting loan-to-values on new loans to remain unchanged and 34 percent expecting them to be further reduced. Overall, 69 percent cited covid as the biggest threat to the sector in 2021. Lenders also voiced concerns about rising unemployment and 12 percent said a UK recession is the year’s biggest threat.

Lenders plan to staff up

Debt providers’ increasingly confident tone was evident in the fact that more than half expect their team sizes to grow, with fewer than 4 percent expecting to make cuts.

According to Schuy, this suggests some lenders are making up for hiring freezes in 2020. “This underlines the overall bullish sentiment of our lender base. There are also organisations that have set up shop since the crisis began, which clearly feel there is demand for additional lending.”

Values are expected to remain stable, but there is caution on LTVs

The survey shows 74 percent expect commercial property values to hold firm in 2021, with just 17 percent expecting a decrease. It also showed lenders are playing it safe, reducing the average maximum LTV they are prepared to provide, with Link noting a 2-percentage-points reduction across lender categories. The average maximum LTV of preferred equity is expected to decline from 90 percent to 83 percent.

Some continental European banks, Middle-Eastern banks and pension funds indicated they would provide slightly higher LTVs. Schuy suggested this shows they are keen to compete for the UK’s best financing mandates.

Margins are expected to decrease

More than half of respondents to the survey expect a reduction in new loan pricing, with only 4 percent expecting an increase, which Link said indicates that lenders are eager to deploy capital in 2021.

The survey shows, for the second year running, that pension funds offered the lowest average margins for investment loans, at 192 basis points. German Pfandbrief banks tied with them as the cheapest lenders in the 2020 survey, although a number of institutions in the latter group were reported to be in the 175-200bps range in the latest survey.

By product type, Link noted a drop in pricing in the preferred equity space from an average of 13 percent to 10 percent to make up for the lower leverage on offer in that part of the market.

Schuy also discussed pricing trends since the onset of the pandemic, based on transaction evidence. He said pricing has been relatively stable. “A borrower, pre-pandemic, which was able to draw on bank financing might now fall outside of what banks may finance during the pandemic. Such borrowers will inevitably face higher financing costs as they can no longer receive bank financing. The choice for those borrowers is no transaction, or a higher-margin financing from an alternative lender.

“From a lender’s perspective, however, pricing has not changed much. Banks continue to price what is still financeable at more or less the same pricing levels. The majority of lenders we have spoken to have responded to the pandemic by leaving their pricing brackets for the capital under management unchanged in exchange for stepping down the risk curve. A minority have responded by increasing the cost of their capital overall.”

Covenants are tighter

As well as reducing LTV in new lending deals, debt providers are requiring tighter covenants, according to the survey. The interest coverage ratio required by lenders for investment loans has been on an upward trend since 2019 and continued, with lenders requesting 22 percentage points more ICR than in 2020. Debt service coverage ratios are also on the rise.

Schuy said: “LTVs have come down and ICR and DSCR covenants have gone up. This is a function of lenders still being prepared to lend but being a little more cautious of the unknowns that are still out there.”

Lenders are wary of covid-hit sectors

According to Link, increased lending by non-bank organisations has helped limit the undersupply of debt in certain sectors of the market. However, the survey shows lender willingness to provide loans in retail, leisure and hospitality has dropped substantially.

In the office sector, Schuy noted that lenders are cherry-picking deals. “No one has been openly saying ‘we don’t do offices anymore’,” he said.

Confidence in development

Link said there are likely to be larger declines in the volume of investment loans than development loans in the retail, leisure and hotel segments.

Schuy said lenders indicated they are more willing to finance hotel developments than investment deals in the sector. “That is a clear indication that people struggle to buy into existing hotel concepts but are much more bullish about the recovery and the prospect of supporting hotels that will open up in two to three years’ time.”

Logistics is the one sector in which lenders indicated a greater appetite for development financing in 2021 than in 2020.

Overall, the survey results show no significant changes to the average maximum leverage on offer for developments, with loan-to-cost at 73 percent and loan-to-gross-development-value at 63 percent.

Schuy added: “Lenders have become pickier about which developments they will finance. Sponsor track record and business plans are under increased scrutiny.”

Lenders look beyond the UK

Link also found that UK-based lenders are more likely to look beyond their country borders for deals, including in Western Europe and the Nordics. Ireland was top of preferred foreign target markets for lenders.

“Not only are teams growing, and new platforms are popping up. There is also interest from UK lenders to expand their horizons and look further afield,” explained Schuy.