Prime margins tighten in competitive UK market, says CBRE

Competition among lenders for prime real estate lending deals in the UK market during Q1 2017 resulted in some unwinding of the rise in loan margins which occurred in the immediate aftermath of the UK’s Brexit vote last June, new research by CBRE suggests.

A fall of around 15 basis points on prime lending margins, coupled with static margins for secondary lending, combined to produce an overall decline in pricing at the all-property level of 9 bps, according to the consultancy’s United Kingdom Debt Prospects report for Q1 2017.

CBRE estimated that senior margins increased sharply by around 25 basis points immediately after the June 2016 referendum result, but remained static overall for the second half of last year. The slight decrease during Q1 2017 has brought the all-property average senior margin to around 2.3 percent, the firm said.

For Q1 2017 originations, senior commercial property lending returns are forecast to be 3.3 percent per year on a gross basis, and 2.9 percent per year on a risk-adjusted basis, which CBRE said represents a decrease of 10-20 bps on Q4 2016 returns. The firm added that senior CRE lending offers an “extremely healthy” premium of 2.5 percent per year to the risk-free rate, on a risk-adjusted basis.

For mezzanine, CBRE estimated returns to be 8 percent per year on a gross basis and 4.3 percent per year on a risk-adjusted basis at the end of the first quarter of the year.