Lenders vow to increase real estate senior debt in 2011

First Lending Intentions Survey reports debt availability up 50% on 2010

Banks and insurers have up to £21bn of senior debt available for UK commercial property lending this year – 50% more than last year.

In the Property Banking Forum’s first UK property Lending Intentions Survey, 70% of the 27 lenders surveyed said they would provide more senior real estate debt than last year. In 2010, this sample lent £14bn.

The encouraging figures are at odds with the last Bank of England Credit Conditions Survey, which reported a fall in credit availability for commercial property in Q1 2011.

Banks told the PBF survey that there is also more senior debt available for high-quality, value-added and secondary property this year, with 70% saying they will lend on these assets, compared with 40% last year.

These lenders said they are prepared to devote 20% or more of their 2011 lending to good, secondary real estate, where skilled asset management can enhance value.

Up to two-thirds of all the senior debt available was expected to finance new deals rather than refinance their own or other people’s loans.

Three insurers are active in the lending market and are increasing their lending significantly this year. “Banks are starting to look forward again,” said Max Sinclair, PBF chairman and head of Eurohypo’s UK division.

“Origination teams can start concentrating on originating new loans. I’m not saying it’s the dawn of a new era, but it is an important step.”

The survey was carried out by Real Estate Capital consultant editor Alex Catalano. She said there are caveats for borrowers, which include the banks finding “the right kind of deals to lend on” and Basel III, which is increasing banks’ focus on more conservative lending: lower loan-to-value ratios and mainstream sectors.

Borrowing costs, which are not expected to fall, stand at 200-250 basis points for prime, vanilla assets and higher for good secondary assets.

But plenty of investors have money to put into real estate, including insurers, pension funds and sovereign wealth funds. Respondents cited possible ways of tapping this capital, including:

  • Banks sourcing new deals for insurers or other investors, while keeping a small portion of the loan and earning fees for arranging and hedging the debt;
  • Banks linking up with insurers to offer existing borrowers refinancing that includes an insurance product;
  • Wrapping insurance around a rated bond, backed by a loan portfolio, giving investors first-loss protection;
  • Developing a common platform that the banking industry can use to distribute real estate debt, which would reassure investors that they were getting a trust-worthy, standardised product, as with German pfandbrief. The PBF is a joint initiative of the Investment Property Forum and the Association of Property Bankers.