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Property debt gap for UK regional markets widens

Lenders keep favouring exposure to central London, despite higher demand for real estate finance in the regions

The mismatch between the supply and demand of real estate debt in the UK regions widened last year, as lenders increased new lending in London despite higher loan requests from markets outside the capital.

Laxfield Capital’s latest UK CRE Debt Barometer report shows that the regions accounted for 58 percent of the total volume of loan requests last year versus 42 percent in London. These figures compare with 49 percent and 51 percent respectively in 2017.

Laxfield said the higher demand for property debt in the regions, which was strongest in the industrial, student and retail sectors, reflected an active investment market in the larger cities outside London.

According to the latest Commercial Real Estate Lending Survey, published by Cass Business School at the City University of London, 61 percent of last year’s total loan origination in the UK, which stood at £49.6 billion (€57.7 billion), was in central London and the south-east of England. This compared with 52 percent in 2017.

The north of England accounted for 10 percent of the UK’s total loan origination. The midlands and Wales accounted for 11 percent; Scotland accounted for 4 percent and the west of England accounted for 3 percent.

Lenders preferred to provide finance in London, despite the higher demand outside the capital. According to Laxfield, the difference between pricing in loan requests between London and regional assets was an average of 22 basis points. This represents a significant narrowing of the premium offered by regional markets in the previous three years, when the average was 52bps.

Loan-to-value requirements in London were lower than in the regions, at 58 percent versus 62 percent according to Laxfield. This illustrated how borrowers are prepared to use more ambitious leverage targets outside the capital while lenders remain conservative.