De Montfort shows UK CRE lending heading for record post-crisis year

New lending to UK commercial property is on course for its highest annual volume since 2008, the latest edition of De Montfort’s bi-annual report on the sector has shown.

New lending to UK commercial property is on course for its highest annual volume since 2008, the latest edition of De Montfort’s bi-annual report on the sector shows.

A total of £24.7 billion of new loans were originated during the first half of 2015, compared with £45.2 billion during the whole of 2014, which was the highest annual volume since the financial crisis. The half-year 2015 total was the highest for a half-year reported since £49.2 billion in 1H 2007.

De Montfort mid 2015 new lending
Value of annual property lending, 1999-2015 mid-year

De Montfort’s Commercial Property Lending Market: Mid-Year 2015  report paints a picture of a well-functioning UK CRE debt market. The number of organisations active in the market has grown, with data received from 83 lending teams from 80 banks, building societies, insurance companies and other non-bank lenders.

Of those respondents, 65 said that they were actively lending. A total of 87 percent of bank, building society and insurance lenders and 95 percent of other non-bank lenders intend to increase their loan book.

Despite a surge in non-traditional lenders from 2013, banks and building societies remained the dominant lenders in the first six months of this year, making 76 percent of all loan originations, up slightly from 75 percent at the end of last year.

However, UK banks’ share of the overall market continues to decline, from 72 percent at its peak to 49.7 percent at the end of 2014 and 48.6 percent in the latest survey. At the half-year, German banks accounted for 10.7 percent of market volume; American banks for 5.1 percent; other international banks for 16.4 percent; insurance companies for 13.2 percent; and non-bank lenders for almost 6 percent. Insurance companies surpassed German banks two years’ ago.

de montfort logoInterest rate margins for senior debt continued their three-year long decline in H1 2015, but the pace of that decline moderated considerably. At mid-year 2015, the average margin for senior loans secured by prime office property was recorded at 214 basis points, down from 218.7 bps recorded at year-end 2014. Margins on loans secured by secondary offices experienced a slightly bigger decline of 8 bps to 256.1 bps during the period.

Margins for junior and mezzanine debt dropped substantially across the sub-sample, ranging between 150 and 475 bps for junior and 275 and 850 bps for mezzanine.

The report suggested that that a floor in margins may have been reached.

Bank, building society and insurance firms reported an increase in average loan-to-value ratios across all sectors except prime industrial. Prime office LTVs edged up, from 66.3 percent to 66.8 percent. Non-traditional lenders offered senior debt secured by prime property within a 65 to 80 percent LTV range, up from 60 to 75 percent at the end of 2014.

There was a pick-up in availability of development finance, particularly for speculative and partly pre-let projects, where non-traditional lenders seem more comfortable providing finance. More than half of the 65 active lenders said they would offer senior debt for fully pre-let development, with 25% saying they would offer junior or mezzanine debt. On speculative development, 26 percent said they would offer senior debt and 15 percent would provide junior or mezzanine debt.

However, the research suggested that banking regulation might be having an adverse impact on development finance by traditional lenders, with only 2.8% of debt allocated to development projects by these lenders at mid-year.

The UK’s legacy debt pile continued to diminish over the period, from £23.2 billion to £15.7 billion of distressed loans. Outstanding debt with a LTV ratio of between 71 and 100 percent fell from £20 billion at year-end 2014 to £16 billion at mid-year 2015.

Total outstanding CRE debt at mid-year stood at £163.7 billion, almost unchanged on 2014 at 1 percent lower. Although this is now a ten-year low, the report concludes that the continuous decline in total real estate debt since 2008 “appears to have almost halted and may subsequently be reversed by year-end”.

De Montfort mid 2015 outstanding debt
Aggregate value (£billions) of outstanding UK property debt reported to De Montfort

Taking into account debt identified by the authors from sources which did not contribute to the report, the overall size of the UK’s outstanding CRE debt was estimated at £210.6 billion.

Ion Fletcher, director of policy (finance) at the British Property Federation, commented: “We seem to have reached a turning point in the amount of commercial property debt in the market, with the impact of post-crisis deleveraging almost totally cancelled out by new lending. While this suggests things are ‘hotting up’, a stabilising of senior debt margins and broadly level LTV ratios indicates lenders remain risk-conscious.

Real Estate Capital reported this week that the De Montfort report’s lead author, Bill Maxted, will retire next July. Maxted, an academic consultant at De Montfort University, produces the report with colleague Trudi Porter twice a year.

The university’s Professor of European Economics, Professor Cillian Ryan told Real Estate Capital: “We are strongly committed to working with the stakeholders across the sector to ensure its continued relevance and impact. Working closely with the sponsors, we are currently in the advanced stages of appointing a successor.”