UK lenders play it safe, survey shows

A survey of UK debt trends shows alternative lenders are encroaching further into senior banks’ territory.

Lenders are determined to write greater volumes of real estate debt in the UK, although many are focusing their activities towards the safer end of the lending spectrum, a new survey shows.

While competition in the conservatively-leveraged senior lending space increased, those providing higher-risk finance, including mezzanine and bridge loans, ratcheted up their loan margins, according to the second market survey conducted by the Real Estate Finance unit of Link Asset Services – formerly Capita Real Estate Finance.

“Senior loans got cheaper overall, but higher-risk lending saw an increase in pricing,” says James Wright, head of Real Estate Finance at the firm. “We recognised significant concern among lenders about the prospects for real estate values. Political risk, expected interest rate rises and a dependence on foreign capital were also cited, with the vast majority of lenders now focusing on core loans and making their portfolios more defensive.”

On an average basis, senior margins – at a 21 basis points drop – were reported to be available at cheaper rates. Mezzanine loan costs, meanwhile, increased by a modest 45bps. Average margins for bridge loans and preferred equity were reported 223bps and 196bps higher, at circa 1,000bps and 1,500bps, respectively.

Looking forward, respondents expect pricing on new loans to remain stable, although almost one in five predict a pricing increase in the coming year.

Pfandbrief banks remain the most competitive lenders in the UK senior debt market, with an average margin of 170bps, plus an 82bps average arrangement fee, down from 200bps and 88bps in Link’s inaugural survey last June. Insurance companies and pension funds are also competitive, at 200bps for senior debt.

Peer-to-peer lenders registered the largest increase in average margins, despite dropping their maximum leverage. As a greater number of online platforms offer investment loans, pricing remains similar to their development financing products, the survey noted.


With the increased focus on senior lending, lenders have converged on the amount of leverage offered for investment loans, although they show far greater risk sensitivity for development finance.

“A lot of lenders have broadened their product offering and that has meant further movement from funds and alternative lenders into traditional banking territory,” says Wright. “To get pricing to competitive levels, they are raising money from investors with lower returns requirements. The senior space is where most business happens, especially as there is more equity in the market, so leverage is brought down.”

The average maximum loan-to-value available on all types of debt remained static, although, within individual lender categories, there was significant change. Debt funds offer the highest overall leverage for investment loans at 83 percent, jumping ahead of hedge funds, which came in from above 90 percent in last year’s survey to below 80 percent.

Mezzanine leverage is generally topping out at around 85 percent, with just four respondents to the survey saying they could go higher. Average maximum LTV on bridge loans stood at 70 percent. Most lenders expect loan-to-value ratios on new loans to remain stable in the coming year, although respondents predicting an increase have risen from one in 20 to one in 10 since last June’s survey.

Despite greater risk-sensitivity, income covenant requirements appeared to be relaxed compared to the previous year’s survey. Insurers were the most income-focused in their underwriting in 2017, requiring income coverage ratio of more than 200 percent, although that slipped back to an average of 185bps. European banks’ average ICR increased by 40 percent since the last survey to almost 220bps, reflecting the agreement in December of the implementation of Basel IV regulations.


As part of the survey, Link assessed the ‘relative’ value of each lender category, with those offering higher maximum leverage at lower margins deemed to be offering the best value. For investment loans, debt funds were deemed to be the best value. However, the report noted that there was less divergence in relative value, with many lenders offering similar LTV.

“Lenders are arguably pricing risk less effectively for senior investment loans by not altering their maximum leverage significantly at differing price points,” says Wright.

Most lender groups were found within 200-350bps pricing and 60 percent to 70 percent maximum leverage. However, debt funds, hedge funds and other alternative lenders were found between 475bps and 625bps, and between 70 percent and 80 percent LTV. Peer-to-peer lenders were the outliers, with pricing at an average of 950bps for around 70 percent leverage.


Peer-to-peer lenders offered the highest loan-to-cost for development financings, at 87 percent. However, the report noted that their loan-to-gross-development-value at 69 percent was bettered by hedge funds and debt funds – each at 71 percent – indicating that peer-to-peer platforms can only offer the highest leverage on the most profitable schemes.

The survey noted a wider disparity in pricing between lender types for construction loans. Peer-to-peer lender represented the best relative value for development lending, offering more than 85 percent of project cost for below 800bps. Hedge funds and debt funds charged the highest margins – between 900 and 1,000bps – although for below 85 percent leverage.

All UK regions increased in popularity with lenders, except London – which despite remaining most popular, saw its lead reduced – and Scotland. By sector, there was a strong shift away from residential and retail sectors and into logistics and hotels. However, offices remain the most sought-after asset class for investment loans.


In total, 72 percent of lenders expected to write greater volumes of loans in the coming 12 months than in the last, perhaps driven by not being able to deploy as much capital as intended in 2017. Meanwhile, 53 percent intend to grow their teams.

The supply of long-term debt continues to grow. With many in the market anticipating a rise in interest rates, there is a trend towards locking in low fixed rates of interest. The report noted seven different lender types able to provide loans for more than 10 years, up from five lender types in the 2017 survey.

“It feels like lenders are now more comfortable operating in this era of political uncertainty. Our 2017 survey reflected a return to confidence following the Brexit result; this one reflected a return to confidence after the unexpected general election. For now, at least, lenders intend to make hay while the sun shines,” says Wright.

“There is clearly a huge amount of capital out there and we can see by lenders’ intentions they want to do more business. The counterweight is that there is more liquidity on the equity side, so there are more deals being done debt-free. However, almost everything is still financeable – at a price.”

In total, Link received 125 responses from 87 separate lending organisations. Asked what the greatest risk to the UK commercial property market will be in the coming 12 months, 70 percent of respondents highlighted political risk. Brexit and a change in government were two recurring responses. Others noted a rise in interest rates and a potential drop in foreign investment capital into the country.

The survey also noted that deals are taking longer to close. Borrowers should assume an average of two months to complete a transaction, the report said, with the average deal taking 53 days to close, compared with 46 days the first time Link ran the survey.