Lenders are likely to attempt to hike loan margins in the UK real estate lending market in the short-to-medium term in a bid to price the increased risk of doing business in the wake of the country’s decision to leave the European Union.
Estimates differ as to the scale of the expected increase in pricing, but lenders told Real Estate Capital that margins could be up by as much as 20 or even 30 basis points as they attempt to discover where sentiment for core pricing has moved following the referendum result.
“Lenders will ask for a premium to counter the leap of faith they will need to take to put a deal in front of their credit committee,” one banker said. “We will have to feel out the market again. During this period it will be all about who wants to take the most aggressive approach.”
That banker estimated that core London pricing would move from around 150 bps before the vote to 165-170 bps. A second banker said that lenders will add 10 to 20 bps, while a third said that margins are likely to be 20-30 bps higher in the coming weeks.
At this early stage, there is limited evidence that banks have progressed with deals since last Friday. However, one financial director at a real estate investment company described closing a loan agreement with a bank last Friday, despite the immediate turmoil caused by the referendum result. The FD added that a loan from an investment bank was expected to fund as planned during the latter part of this week.
No lender will say that they have pulled the shutters down on new business, claiming instead that they are progressing with caution, taking a selective view as to what they will consider financing and giving fresh scrutiny to ongoing deals.
“This is going to have an impact on larger deals,” one head of real estate lending at a bank commented. “Some banks are holding back, so I would expect there to be less liquidity in the syndication markets for larger loans. We are looking at transactions now, but we will be more cautious about large underwrites. We might need a lending partner to join us up front in larger deals.”
One debt broker who has spent the week gauging the mood in the lending community said that there is a fair amount of “navel-gazing” going on. “They are seeking assurances from credit committees and head offices as to what they can and can’t do and as to how they should move forward. The majority of people say they are open for business as usual, but they have to be cautious. I’ve not heard anyone say they’ve stopped lending.”
There are concerns that the uncertainty created by the Brexit vote will lead those looking at the UK on a relative value basis to pass on opportunities: “Why would a Chinese bank do a deal at 165 bps in sterling in London when it could do 225 bps in US dollars in Manhattan? It’s a huge gap,” one source said.
Bank of England governor Mark Carney’s proclamation on Thursday (30 June) that monetary policy easing is likely hints that a cut to the 0.5 percent interest rate is on the cards, a move which would place additional pressure on banks as they aim to raise their lending margins.
Several have repeated the refrain that this crisis bears little resemblance to the credit crunch, when the collapse of Lehman Brothers took the industry by surprise. “Brexit won’t mean it is 2008 again,” said one debt fund manager. “The whole market is better capitalised than during the financial crisis. There is less debt in the property industry as a whole; almost 50 percent less than in 2007. The whole market is less geared.”
“Property relative to gilts is good value,” the debt fund manager continued. “The City of London was overpriced and coming down anyway.”
One market participant, who was a lender at the time of the credit crunch, explained that banks will have spent the run-up to the referendum devising risk management strategies for this eventuality: “They will be focussed on quality sponsors and quality assets and will limit their risk by entering into club deals. They will limit exposure to any single borrower and will examine their exposure to any particular tenant across their loan book.”
Increased regulation and the more cautious lending terms adopted by banks in recent years will mean that loan books are better placed to withstand any fall in property values which might result from Brexit. “Our loan book has never been in better shape,” one banker said.
For the time being, real estate lenders will continue to take stock amid the wider political and economic uncertainty which has gripped the UK. Information remains a premium and many in the market are playing their cards close to their chests, while testing the mood within their competitors. “There are lots of calls going on between banks,” one said.
Ultimately, real estate lenders’ activity will be led by the amount of investment in the market. Amid rumours that significant deals have fallen out of bed during the last week, lenders will be mindful that they will need to compete for financing mandates if they are to finish the year even close to hitting their lending targets.