The rapid fall in senior debt margins in UK real estate is becoming “painful” according to Lloyds’ global head of commercial real estate, John Feeney.
Speaking at Real Estate Capital’s London forum he told delegates: “There’s been sustained pressure on margins across the board and we have reduced them in line with competitors. We need to be competitive to win transactions, and we have the wind at our back because of our low cost of capital, but it is becoming quite painful in terms of return on capital.
“We find it difficult to understand how some competitors are making an appropriate return on their capital. It is getting stretched and more difficult to follow the market down”, he said.
The UK real estate lending market has seen a rapid improvement in the availability of leverage in the last 12-24 months and increased competition with new players entering as well.
Margins had come down to 150 basis points with “a few outlier deals lower” according to the Lloyds chief. However, he added that the pace of compression “has slowed” recently and “away from the hotly competed large-ticket deals, margins are better”.
Feeney, who recently took over the merged global corporate and mid market property lending teams at the bank, said that Lloyds’ extensive branch network gave the bank an advantage in the marketplace, particularly for smaller deals.
“It is difficult for new lenders to access the market. Its quite easy to roll up with a few billion to lend in the London market and go out to big well-known borrowers and put capital to work…but its difficult for them more broadly”.
Mark Davies, finance director of quoted secondary retail property specialist New River Retail, said it was a good time to be borrowing with healthy “competitive tension between borrowers and lenders”.
Although margins were important, he said property companies “had to look at the whole package”. He said the increase in 5-year swap rates and the cost of typical hedging to between 190-210 basis points over the last 12 months, for the type of assets New River buys, means borrowing costs haven’t changed substantially at about 4%.