UK commercial property lending steady throughout 2016, despite Brexit vote

27 Apr 2017

Policy area: Brexit, Town centre & Retail

Research, however, signals increasing caution among lenders and identifies wide disparities in lending across the UK’s regions.

Despite the uncertainty surrounding the EU referendum vote, new lending activity 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. Lenders originated £21.4bn in the first half of 2016 and a marginally higher £23.1bn in the second.

In a shift from 2015, where 55.6 percent of debt issued was for new acquisitions, 61 per cent of new lending in 2016 was refinancing for existing loans, which is felt to benefit lenders with a large existing client base.

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.

UK Banks & Building Societies increased their market share of new loan originations to 45 per cent at year-end 2016 – compared with 34 per cent in 2015. While some non-bank lenders were also able to increase their market share, most categories of lenders, including North American banks and insurance companies, recorded a decline in market share.

Furthermore, UK Banks & Building Societies were responsible for 44 per cent of commercial development funding and 69 per cent of all residential development funding. In total they completed £5.4bn of development lending transactions during 2016. The total development funding supplied by all lenders was £7.7bn.

The report also shows that market liquidity remains strong, with competitive pricing and lending terms for prime property. While average interest rate margins fell slightly over the course of the year, they picked up during the second half, suggesting an end to the trend of falling margins observed since 2012.

Average maximum loan-to-value ratios declined during the year by around 5 per cent for prime office senior loans and the average ratio for senior loans secured by secondary property was by the end of the year below 60 per cent for office, retail and industrial property.

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 4 per cent in Scotland.

Ion Fletcher, Director of Finance Policy, British Property Federation commented:

“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 said:

“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 added:

“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 added:

“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 added:

“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.”