ANALYSIS: De Montfort Report – UK CRE loan book shows first post-crisis growth

The total value of outstanding commercial real estate debt in the UK grew for the first time since 2008, writes Daniel Cunningham.

The total value of outstanding UK commercial property debt grew during 2015 for the first time since the Global Financial Crisis, according to the latest biannual lending market report from Leicester’s De Montfort University.

The value of the outstanding UK CRE loan book increased by 1.9 percent during 2015, the first increase recorded by the De Montfort Commercial Property Lending Report since 2008.

The recorded value of outstanding debt retained on balance sheet had declined for six consecutive years until the end of 2014, with continued decline to mid-2015, when it stood at £163.7 billion. However, a £4.7 billion increase during the second half of 2015 brought the year-end total to £168.4 billion.

Loan origination was at its highest gross annual volume since 2007. During 2015, loans with a total value of £53.7 billion secured by UK commercial property were originated, up 18.8 percent from £45.2 billion during 2014. UK banks and building societies accounted for 34 percent, while insurers wrote 16 percent and other non-bank lenders accounted for 9 percent.

The report, now in its eighteenth year, is the last to be compiled by Bill Maxted and Trudi Porter and the first to be co-authored by former Deutsche Bank banker Nicole Lux, who will take over. Data was received from 83 lending teams across 80 organisations, of which 66 reported that they were active in 2015.

Allocation of loan OriginationsDe Montfort attempted to estimate the total value of the entire UK CRE debt pile, including information from outside its sample. The authors identified £14.9 billion of debt secured by social housing and a further £22.1 billion of loans which were committed but not drawn down by year end. Taking into account debt identified on company balance sheets and CMBS data, but excluding UK-related debt held by Ireland’s National Asset Management Agency, the report estimated the total debt pile at £209.9 billion, up almost 1 percent during 2015.

Leverage across the debt pile continued its gradual fall. By the end of 2015, 37 percent of debt held by banks, building societies and insurers against investment properties had an LTV of 50 percent or less. In total, 50 percent of debt was in the 51-70 percent LTV range. This compares to 32 percent and 44.7 percent in the respective LTV bands at the end of 2014.

The estimated volume of distressed debt halved. The report identified as much as £12.1 billion of distressed loans, either in breach of financial covenant or in default, from banks, building societies and insurers. The corresponding value at the end of 2014 was £23.2 billion.

Alternative lenders increased their market share. The proportionate market share held by UK banks and building societies declined from 49.7 percent to 45.4 percent, while insurance companies’ slice of the market increased during the year from 12.7 percent to 15.1 percent and other non-bank lenders achieved a marginal increase from 6.5 percent to 6.8 percent. North American lenders’ share went up from 4.8 percent to 6.3 percent.

Overall, 55 percent of contributing organisations reported an increase in the value of their outstanding loan books during 2015. The value of the aggregate loan book held by other non-bank lenders excluding insurers increased by 7.5 percent from £10.7 billion to £11.5 billion.

Only 21 percent of UK banks and building societies reported an increase in the size of their individual loan books during 2015. Overall, their aggregated book size declined from £82.1 billion to £76.5 billion. The category does though include 14 lenders with a total loan book of £10 billion which have withdrawn from the market and are deleveraging their portfolios.

Contributors to the report demonstrated an appetite to increase their activity. A total of 83 percent of banks, building societies and insurers said they intended to increase their loan book and 70 percent said they intended to increase loan originations. However, just 22 percent intend to securitise debt this year, while 57 percent intend to syndicate and 74 percent plan to participate in club deals.

The report demonstrated the growth of the syndicated loans market in UK CRE. During 2015, £9.2 billion of debt was reported as being syndicated from the UK balance sheets of participating organisations. The value far exceeds the £4.7 billion recorded at the end of 2014.

UK CRE debt remains heavily skewed towards investment finance, although there was a marginal increase in the volume of development loans. Of a total £171.8 billion held by banks, building societies and insurers including social housing debt, 80 percent represented investment finance. Fully pre-let development loans stood at 3 percent, residential development loans at 6 percent, and speculative commercial development loans accounted for just 1 percent. In total, development finance from this category of lenders increased from 9 percent to 10 percent over the year.

On loan originations by banks, building societies and insurance companies, the proportional allocation of debt by project type was little changed from 2014. Last year, of £48.7 billion of originations, these lenders allocated 84 percent to investment property, 4 percent to commercial development and 11 percent to residential development.

Comparison of senior debt

Margins creep up and LTVs edges down

During the last six months of 2015, average interest rate margins across all CRE sectors increased according to the De Montfort report. The average margin for investment loans from banks, building societies and insurers secured by prime office projects stood at 218.7 bps at year-end 2014, declined to 214 bps at mid-year 2015, but increased to 222.7 bps by year-end 2015.

The average margin on fully pre-let office development declined to 321 bps at mid-year but increased during the second half of the year to 339 bps recorded at year-end. Four banks, building societies or insurance lenders provided terms for speculative office development. During the last six months of the year margins in that category increased to 384.3 bps.

Average LTV of investment loans across all sectors continued to increase during the first half of 2015 from this category of lender. However, a decrease was recorded in the second half. The average LTV for loans secured by prime offices was recorded at 66.3 percent at year-end 2014, 66.8 percent at mid-year 2015 and 64.9 percent at year-end 2015.

Six banks, building societies and insurers indicated that they were prepared to provide junior and mezzanine finance. Average margins declined for junior debt and mezzanine finance and ranged between 185 bps to 650 bps for junior debt and 300 bps to 1,000 bps for mezzanine finance.

Meanwhile the report showed that senior debt accounts for the largest proportion of finance held in the aggregate loan book of non-bank lenders, excluding insurance companies.

At year-end 2015, 72.25 percent (£8.3 billion) of the £11.5 billion of debt was allocated to senior debt compared with 69 percent (£7.4 billion) at the end of 2014. However, the volume of junior debt also increased, with 10.25 percent (£1.2 billion) recorded at year-end 2015 compared with 6 percent (£600 million) at the end of 2014. The proportion of mezzanine debt declined at year-end 2015, standing at only 17.5 percent (£2 billion) compared with 25 percent (£2.7 billion) at the end of 2014.

Alternative lenders allocated a greater proportion of origination, approaching 23 percent, to development projects compared with 15 percent recorded by more traditional lenders.

In total though, the volume of loan originations from other non-bank lenders was down during 2015. These lenders originated £4.7 billion in 2015, compared to £6.1 billion in the previous year.

Non-bank lenders were prepared to offer senior finance at 65-70 percent LTV within a pricing range of 190-500 bps. Junior debt for prime offices was offered at margins ranging from 6.5 percent to 12 percent.

Alternative lenders were prepared to provide residential development finance at 85 percent loan-to-cost at pricing ranging from 700 bps to 1,200 bps. Speculative commercial development terms were offered at 85 percent LTC at 975 bps.