Commercial property lending market remained stable at start of 2016, despite EU Referendum uncertainty

17 Oct 2016

Policy area: Tax & Finance, Brexit

Despite uncertainty ahead of the EU Referendum, the first half of 2016 saw the UK’s commercial property loan market continue to grow and show signs of further stabilisation, according to the 2016 Half Year De Montfort Commercial Property Lending Report.

At mid-year 2016, the total amount of outstanding debt for UK commercial property was £173.4bn, up from £168.4bn at year-end 2015, an increase of 3%.

Despite the increase in loan book size, new loan originations fell by 13% to £21.4bn. This compares with £24.7bn in the first half of 2015 and £53.7bn for the whole of that year and reflects a reduction in the amount of real estate investment compared with 2015.

UK banks & building societies saw a sharp rise in their share of new origination, from 34% at the end of 2015 to 44% at mid-year 2016. American banks saw their share decline from 14% to 7% and the share of insurance companies, which were the second largest category of new loan originators in 2015, declined from 16% to 10% in the first six months in 2016.

Lenders continued to move away from commercial development finance, with 11 organisations providing data for finance of fully pre-let development at mid-year 2016, compared to 18 at mid-year 2015. The average interest rate margin was 348bps at mid-year 2016, an increase from 339bps reported at year-end 2015.

The large majority (89%) of loan exposures now have a LTV ratio of 70% or less, while only £4.5bn worth of loans, or 2.6% of the total aggregated loan book was in breach of financial covenants or in default. Lending organisations commented that virtually all of their problems related to loans written before 2009 had now been addressed and no significant breaches and defaults were recorded on new loans.

The average LTV provided by UK Banks & Building Societies was 59% compared to 65.6% LTV at year-end 2015 – a noticeable drop.

Interest rate margins on prime office property commanded the narrowest margins of 191bps during the first six months of 2016 and before the EU Referendum took place. This is a decline of 31bps since year-end 2015. However, there is a clear distinction between prime and secondary property loans, with fewer lenders willing to quote margins for secondary property. The average senior margin for secondary offices, retail and industrial ranged from 279 – 305bps – a range similar to that recorded at the end of 2015.

Ion Fletcher, director of policy (finance) at the British Property Federation, commented: “The reduction in new loan originations and activity reflects the general market slowdown we have seen so far this year. Uncertainty ahead of the EU Referendum may have played a part, but there were signs that the property market was cooling off anyway.

The lending market seems to remain relatively unchanged with moderate LTV ratios. However, the lack of funding for development remains a problem, and the report also suggests that lenders are lending against a narrower range of property than in the past, which suggests that recent regulatory changes may inadvertently be driving concentration risk among lenders.”

Peter Cosmetatos, chief executive of CREFC Europe, the property lenders’ industry association, said: “The data support the view that the UK property lending market was generally stable and healthy coming into the Brexit vote – which has helped the industry weather the shock of the result.  What is really striking is the way UK banks and building societies recovered market share in origination as North American banks and insurers, in particular, held back during the first half of the year.  It will be fascinating to see where origination comes from in the second half.”

Chris Holmes, EMEA head of debt advisory at JLL, added: “The new origination volumes are down mirroring the slowdown experienced since the start of 2016. What is more apparent now is that warehousing risk on balance sheet for investment banks, typically North American, has become more difficult in 2016 without smooth functioning distribution channels such as CMBS or perhaps more liquid syndication to international lenders. The velocity of capital has slowed and evidenced by larger clubs with take and hold positions for primary underwriting lenders and the investment banks are taking less risk.”

ENDS