Fresh sources boost flow of new property debt

Wider range of lenders have growing real estate debt appetite, reports Alex Catalano

The UK’s real estate debt market has turned the corner, the latest UK Commercial Property Lending Market report from De Montfort University has confirmed. The study shows more finance is available, there is a greater diversity of lenders and the debt mountain accumulated during the last boom is now £72bn lower than at its peak. “This confirms what our members are saying to us: that activity levels are rising and the appetite for new business is increasing,” says Henri Vuong, a board member of the Association of Property Lenders.

Last year, the total value of outstanding debt held against UK commercial property fell by 9.1%, from £198bn in 2012 to £180bn (see fig 1). As the UK recovery spreads to secondary and tertiary assets, lenders are getting tougher and speeding up the clearance of their legacy debt. Customers’ paydowns – or what the report calls “lender-influenced sales”,  including foreclosures – accounted for 29% of the shrinkage (see fig 2), while another 30% came from customers repaying loans at maturity and scheduled amortisations.

Plus, lenders sold around £5bn worth of loans, accounting for 16%. This clear-out has helped improve the quality of loanbooks. Loan-to-value levels for legacy debt have fallen: now ‘only’ £30bn, or 20% of the total, has LTV’s of more than 101%, compared with £46bn in 2012 (see fig 3). Lenders also reported that half their loans are now backing prime property, up from 42%. Credit is more plentiful; new lending – including refinancings on market terms – was 17% up, to £30bn (see fig 4). This is the highest post-crash figure yet, but not as big an increase on 2011.

FIERCE COMPETITION FOR BIG DEALS

“This suggests that the best buildings are being bought with cash by foreign buyers and UK institutions, so lenders are competing for a smaller volume of
big-ticket deals,” suggests Savills’ director  of valuation William Newsom. In addition, banks extended the maturity on £6.5bn of loans that were due to be repaid in 2013. Banks remain the most significant financiers, with the 12 largest lenders holding 75% of all outstanding CRE debt in 2013. But this is significantly less than the 83% share they held immediately after the boom in 2009. And less is being held by UK banks, whose share of the outstanding debt pie is now down to 55%.

Debt is now being provided by a greater diversity of lenders, however, reflecting the entry of more insurance companies, funds and others into the UK market. “Although the market is still dominated by balance-sheet lenders such as banks, the role of non-bank lenders has increased in significance, releasing the industry from being over-reliant on one debt source,” notes Vuong. Non-bank lenders accounted for nearly a quarter of new loans in 2013, compared with 15% the previous year. This element was fairly evenly split between insurance companies, which provided £3.4bn of new debt, and other non-bank lenders, which provided £3.5bn.

LOAN BOOKS SET TO GROW

Moreover, the majority of lenders – 60% of banks, building societies and insurers said that they wanted to increase their loan books (see fig 6). This is a marked increase on 2012, when only 46% were willing to do so. Not surprisingly, the newly arrived non-bank lenders were unanimous in planning to lend more. Margins, which peaked at around 330pbs on average in 2011 during Europe’s sovereign debt crisis, dropped once more and sharply last year. For prime offices they fell by around 70bps, as more lenders competed for deals.

“There is growing confidence on both the lenders’ and borrowers’ side, as the economy improves,” says Vuong. Another signal that lenders are becoming more confident is that for the first time in several years, they indicated that they would be willing to lend on speculative commercial development. LTV levels have also been creeping up, with the average LTV ratio for new loans standing at 66% in 2013, compared with 64% the previous year.

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