Despite the uncertainty surrounding the EU referendum vote, new loans in the UK commercial property industry remained steady throughout the year – albeit at lower levels than in 2015 – according to the 2016 Year-End De Montfort Commercial Property Lending Report.
The most comprehensive study of the UK’s commercial property lending market shows that while new lending was down by 17 per cent in 2016, compared to its post-crisis peak in 2015, the vote to leave the EU seems to have had minimal impact on new lending activity.
In a shift from 2015, where 55.6 percent of loans were for new acquisitions, 61% of new lending last year was refinancing for existing loans. The percentage of new loans from UK Banks & Building Societies increased last year.
At year-end 2016, the total value of loan books identified by this research grew a moderate 0.5 per cent to £191.5bn, including both drawn and undrawn amounts, yet total drawn debt declined by 2.1 per cent from year-end 2015 to £164.8bn.
Geographically, the data highlights significant regional disparities with 63 per cent of the total debt secured against property in London and the South East. This compares with 12 per cent for the North, 11 per cent in the Midlands and Wales, and four per cent in Scotland.
Academics at De Montfort University Leicester (DMU) have been compiling the report since 1997, using data submitted by almost 60 lenders such as banks, building societies and insurance companies.
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It is seen as one of the most comprehensive indicators of the property market worldwide and is used by the Bank of England within its Financial Stability Review.
Dr Nicole Lux, senior research fellow in DMU’s Department of Accounting and Finance, said: “The real estate investment market is experiencing a maturing but extended cycle with structural economic support due to very low interest rates. Historically we have seen high capital values driven by high leverage but today we have high capital values driven by equity with relatively low leverage.
“Despite conservative LTV levels, low property yields put pressure on interest rate coverage for prime property loans.”
How major influencers reacted to the report
Ion Fletcher, Director of Finance Policy, British Property Federation:
“The apparent stability of the lending market masks a couple of underlying trends that could be important from a policy perspective; namely the continued rise of debt secured against London property – which now represents almost half of the outstanding total – and the continued relative dearth and high cost of development finance. These contrast with the Government’s objectives to promote economic growth across the whole country and stimulate new development activity, particularly for new homes. If these trends are driven by regulatory factors, policymakers should be thinking about how to mitigate them.”
Peter Cosmetatos, Chief Executive, CREFC Europe:
“The market seems relatively resilient and stable, with signs that lenders are becoming increasingly cautious. This can be seen in the historically high concentration of lending in London and the South East, persistently limited appetite for development lending, and falling LTVs and rising margins. While the property cycle seems to have some way to go, interest rates and other macro factors are responsible for that, not lender exuberance.”
Neil Odom-Haslett, President, Association of Property Lenders:
“From speaking to our members, lenders as a rule don’t like uncertainty or surprises and, over the last 12 months, there has been a fair share of both. As a result, it is clear that the lending community has become more cautious. The bias towards lending in London and the South East continues, and development finance remains scarce, and this will not change in the short term – unless of course the regulators and policymakers intervene in some way.”
Ian Malden, Head of Valuation, Savills added:
“The property lending market appears to have reacted well to regulation and market pressures post the global financial crisis with evidence that lending is more prudent. This is important given the extended nature of the current market cycle with more conservative LTV’s providing greater resilience to possible corrections in values and pricing.”
Tim Crossley-Smith, National Head of Valuation Consultancy, GVA:
“Marking the 10th anniversary of the peak of the last cycle, it is fascinating to compare the changing environment for property lending revealed in this year’s survey. Total outstanding loan book value has reduced by around 20% during this period, with LTVs for prime investments falling from 80%+ to 60%. At a time when capital values in general remain some 20% below peak levels, lenders look comfortably placed, although historically low yields for prime property continue to put pressure on required ICRs.”
Chris Holmes, EMEA Head of Debt Advisory, JLL:
“The market reached a new equilibrium at the end of 2016. Established banks were operating cautiously post referendum with a tendency to lower leverage and higher margins. This gave a clear signal to Non-Bank Lenders who continue to increase market share by taking stretched senior risk and development risk in return for higher loan margins. We anticipate a continuation of this trend, particularly as it is difficult to secure development funding at reasonable margins on anything other than the most conservative deal structures. If the forthcoming election returns a more stable political outlook, it is possible that the strong supply of liquidity to Commercial Real Estate Finance will reverse margin increases seen since June 2016.”
Posted on Thursday 27th April 2017