New lending to UK real estate is up nearly 50%, hitting its highest level since 2008 according to De Montfort University’s half-year Commercial Property Lending Report.
The report, which covers the six months to June 2014, showed that new lending totalled £19.6bn in the first half of this year. This was a 46.3% increase on the same period last year when £13.4bn was lent.
In 2013, new lending was just shy of £30bn in the whole year, at £29.9bn so the H1 2014 figure indicates that this year could be at least £40bn.
“You feel the last six months have been more active than the first six months of 2014,” says Brendan Jarvis, European head of real estate at Barclays. “I don’t expect it will be the same year-on-year increase as for the first half though but the second half is normally distorted by a lot of closings just before the year end.”
The research shows a better functioning debt market than in previous years, with a greater diversification of lenders, lower LTVs and a gradual increase in lending away from the capital.
The lending landscape has also become more diversified with UK banks and building societies now accounting for only 36% of new lending compared to 43% in 2013 and 72% in 2008. North American banks are stepping into the fray, accounting for 12% of new lending in the first six months of 2014 compared to 5% in 2013, whilst insurance companies (11%) and other non-bank lending (12%) remained constant.
However, despite the increase in new lending, total outstanding debt held against UK property actually reduced by £9.3bn during the period to £171bn. This was largely due to institutions actively reducing their legacy loan books. The reasons given by lenders for a decrease in the size of their books included loans being sold (25%), lender instigated sales (16.5%) and loans being written off (5%). Customers paying down debt on existing loans accounted for 24.5%, above and beyond scheduled repayments and amortisations (20%).
The reduction in legacy loans also resulted in a decline in average LTVs across lenders’ books. Debt with LTVs of 70% or less accounted for 66.5% compared with 63% at the end of 2013. Outstanding debt with a loan-to-value ratio of between 71% and 100% fell to 16%, compared with 18% at year-end 2013.
Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council Europe, said: “The recovery in commercial real estate debt markets, so long delayed, has been dramatic now it’s finally here. It’s good to see the focus of the De Montfort report increasingly shift from legacy problems to a diverse and growing lending market. It is to be hoped that ongoing regulatory developments support a period of healthy growth rather than undermining or distorting it”.
The propensity for lenders to be active outside London when financing prime property was notable, although this fell off sharply when considering development projects, secondary and tertiary property.
In London 80% of organisations were prepared to lending on prime investment, which was not dramatically different to the South West (67%) or the North East (63%). Lenders were least inclined to lend on prime property in Northern Ireland (46%).
The contrast was much more dramatic in the secondary market, with 72% of lenders being prepared to lend on secondary buildings in London but only 41% would do so in Scotland and 31% in Northern Ireland. Similarly 51% of lenders said they would now be prepared to fund development projects in the capital but only 26% would do so in the West Midlands and 15% in Northern Ireland.
The overall increase in new lending has heightened competition and as a result put increased pressure on margins. The average margin for loans secured by prime offices was recorded at 226.5bps – a decline of 26.4bps from year-end 2013 and margins for loans secured by secondary offices declined by 28.8bps to 275.7bps.