Real estate lenders increased the amount of debt they provided in the UK in the first half of 2019, despite lower transaction volumes and tighter lending margins, the latest UK Commercial Real Estate Lending Report by City, University of London’s Cass Business School reveals.
Commercial real estate lenders originated 4 percent more debt in the UK in the first six months of 2019, against a backdrop of lower property investment volumes over the same period, down by 22 percent year-on-year to £21.5 billion (€24.8 billion), according to consultancy firm JLL.
Debt providers originated £23.4 billion of loans in H1 2019, but only 39 percent of total origination came from new acquisition financing, highlighting a debt market dominated by refinancing and restructuring activity.
“Real estate lenders have had an incredibly busy first half as they refinance their legacy loan books and reposition some of their retail lending,” said Neil Odom-Haslett, president of the Association of Property Lenders, a sponsor of the report.
“There has been strong competition at the prime end of the lending market, particularly in central London, with financing opportunities aggressively priced by some lenders, while at the other end of the spectrum, lending against secondary shopping centers, has proved a bit more tricky and margins have widened,” he added.
German banks had the largest decrease in loan originations, down by 30 percent to £1.9 billion year-on-year, while the UK banks were the most prolific lenders, accounting for 41 percent or £10.7 billion in total loan origination. Non-bank lenders, excluding insurers, registered a 14 percent rise in origination to almost £4 billion.
Only 36 percent of loans held by alternative lenders are below 60 percent loan-to-value. The report found that smaller lenders, with balance sheets of up to £500 million, do 49 percent of their underwriting in loans above 60 percent LTV.
“This report confirms the growing structural importance of less mainstream lenders,” Peter Cosmetatos, chief executive of CREFC Europe, said.
“Not only does the research show the outsized role played by other lenders (and smaller lenders more generally) in higher LTV lending. It also shows that, with the activity of insurers and UK and German banks dominated by refinancing, other lenders and smaller lenders (along with other international banks) are also providing a disproportionate amount of the acquisition finance available to the market,” he added.
The development finance pipeline has been stable during H1 2019, but undrawn facilities increased to £27 billion during the first six months in 2019 from £22 billion at year-end 2018. This indicates a further amount of development finance available for drawdown later this year. Development loan pricing is competitive for pre-let schemes, but margins remain high for speculative finance as well as residential development finance, albeit at slightly higher LTC levels, according to the report.
Pricing of loans for prime London office properties remains “extremely competitive”, ranging from 140bps to 200bps, the report says. Meanwhile, pricing for loans against secondary properties and locations remains 80-100bps wider than prime assets. Loan pricing against secondary retail properties, for which valuations have been under pressure due to structural changes in the sector, ranges from 330bps to 600bps for relatively low LTV’s of 45-55 percent, according to the report.