New lenders may struggle to do the deals they had hoped to, as pricing for commercial property investment finance has sharpened and they may not be able to compete. Lenders say margins have fallen since January, by as much as 50bps for some UK property.
“Spreads have started to tighten,” said Charles Daulon du Laurens, head of investor relations at AXA Real Estate’s four-year-old debt business.“We did anticipate this, but now the change is happening very quickly.”
Andrew Goodbody, head of debt advisory at Montagu Evans, added: “Since the start of the year people have been sharpening their pencils to get a start on meeting their lending targets.
“Competition has increased; more lenders are active and have bigger targets. Some banks are being particularly aggressive and quoting margins in the low twos to win business, which is quite surprising.”
Mark Titcomb, head of Deka’s UK lending business, said this will “force some of the new lenders into slightly more complicated or secondary assets and that process will take time”. Meanwhile, new lenders with experienced teams seem likely to benefit.
Daulon du Laurens said: “We have a tiered market. There is a segment in senior lending with much less competition – on properties with re-letting or refurbishment risk, such as Devonshire Square, where spreads continue to be juicy enough.
“This is a segment where we intend to continue investing.” AXA took a participation in the loan made to Blackstone on Devonshire Square in the City of London last year.
“Lenders are also going up the risk curve noticeably and some are stretching senior up a bit, increasing loan-to-value ratios up to 70%,” Goodbody said. However, the lending appetite is not yet supported by deal flow.
“People are realising that they cannot deploy capital if they have such a narrow focus,” he added. “The more proactive are prepared to widen lending criteria and consider secondary now, while others may be forced to switch this year.”
Titcomb cautioned that underlying weak occupational demand sets the overall scene within which lenders operate.
However, he added: “Clearly there is more liquidity around and the UK is still a relatively attractive lending market against all others, albeit less profitable than last year.”