Real estate lenders in the UK proved most willing to finance residential assets during the first half of this year as they took a defensive approach to the market, according to the author of the biannual UK lending market survey published by The Business School – formerly Cass Business School – at City, University of London.
Nicole Lux, senior research fellow at the business school, spoke to Real Estate Capital on the occasion of a webinar on the property market’s debt funding gap, hosted by law firm Dechert. The Business School’s UK Commercial Real Estate Lending Report: Mid-Year 2020 is due to be published on 15 October.
Lux said the latest research showed 29 percent of total new debt originated in the UK in H1 was allocated to the residential sector, with 18 percent written against development schemes – accounting for £2.5 billion (€2.7 billion) and £1.5 billion, respectively, of the UK’s total £15.5 billion origination during the period.
“A lot of lenders have been focusing on residential, both investment and development, because it has been seen as a defensive bet during covid-19,” she said, adding that private rented sector assets proved particularly popular with debt providers.
Lux said offices were the second most popular property type for lenders during the period, accounting for 24 percent of new loans. The sector remained the mainstay of senior lenders’ activities, accounting for 57 percent of German banks’ new UK lending and 49 percent of insurance companies’ origination.
“Most lenders are staying away from retail, they are not financing new loans, although the current exposure to the sector has not come down,” Lux said.
She explained that outstanding loan amounts allocated to the sector have remained stable, due to lenders extending existing loans that could not be repaid or refinanced elsewhere.
Looking forward, Lux said lenders’ willingness to write new loans will be highly dependent on asset types and locations. For example, interest in secondary assets has dwindled overall. Logistics and industrial assets are lenders’ preferred option, regardless of location, when considering new financing requests, she added.
Also speaking to Real Estate Capital ahead of the webinar, Dechert real estate finance partner Aparna Sehgal, said the most immediate issue facing real estate borrowers going forward will be to meet interest payments.
“There will be considerable pressures on landlords and borrowers, which will need to find the cash to keep interest payments current, once government support and sector-specific interventions end,” she said.
“Some sponsors were in good health before covid-19, and they may have taken the space afforded by government interventions in the landlord/tenant relationship to cash-pile, but others simply will not have the necessary buffers and will have been dependent on the government interventions for breathing room.”
Sehgal warned that a build-up of unpaid rent could create a “domino effect” for landlords, which will need to find cash to meet interest payments to their lenders.
Lux added that, according to data provider REMIT Consulting, only £1.6 billion of a total £2.3 billion of rent due across all sectors in Q2 has been collected. She added that the total rent due corresponds to £1.6 billion of interest due to lenders, of which 43 percent is to be paid to UK banks.
“We have made calculations on interest payments because lenders will, at some point, be affected by landlords’ inability to collect rent. Interest coverage ratios were very high so, in theory, they should be fine if rent was collected, but that has not always been the case,” Lux said.
“In the logistics sector, for instance, only 52 percent was collected by landlords in Q2, according to REMIT, which puts pressure on interest coverage ratios.”