UK commercial property lending steady throughout 2017 thanks to busy second half

27 Apr 2018

Policy area: Tax & Finance

  • New loan origination picked-up in second half of 2017 (£26.8bn)
  • Increase in agreed development finance (13% y-o-y) and undrawn loan commitments (29.7% y-o-y)
  • Alternative lenders (insurance companies and other non-bank lenders provided nearly a quarter of new lending in 2017 (24%)

According to the Cass UK Commercial Real Estate Lending Report, new lending in 2017 finishes on par with 2016 volumes. Despite the drop in lending activity by 24% year-on-year during the first half of 2017 with £17.6bn of new origination, the second half of 2017 was much busier adding another £26.8bn. The combined total new origination reached £44.5bn for the whole year, the same as 2016.

The most comprehensive study of the UK’s commercial property lending market shows that a substantial amount of new lending was agreed during the second half of 2017. In addition, the study recorded a higher than usual amount of £34.5bn of undrawn funding, which has been agreed during 2017 and is largely linked with development funding. Hence, the official amount of committed debt understates the origination figure of £44.5bn.

At year-end 2017, the total value of loan books identified by this research grew by 4% to £199bn, including both drawn and undrawn amounts, while the total drawn debt remained steady at £164.5bn.

Non-bank lenders were the most active group. They increased their market share of new origination to 14% from 10% a year earlier. This is mainly due to the expanding universe of non-bank lenders joining the survey or launching new debt funds. In total they wrote £6bn of new loans of which 60% was sourced from insurance and pension funds.

Other International Banks lagged behind in origination in 2017 compared to previous years with a market share of 8% of new lending.

Development lending has reached a new peak with £22bn of loan books in development finance, of which £8.7bn was new funding. The majority is allocated to residential development finance. UK Banks & Building Societies provided the bulk of new development finance. They were responsible for 57% of all residential development funding and 44% of commercial development funding.

The report also shows that market liquidity remains strong, with competitive pricing and lending terms for prime property. While average interest rate margins for prime office stood at 203bps at year-end 2017 compared to 198bps at year-end 2016, the margin for lower LTV funding up to 60% LTV was 188bps. Mezzanine finance margins for loans against prime properties have increased over the last 12 months in 2017 by 40-60bps.

Average LTV ratios remain low and 78% of the total outstanding loan book is held in loans with LTV ratios below 60%. Any potential risk is expected to come from an interest rate rise, which is going to have an impact on debt servicing levels for unhedged floating rate loans. These currently account for £28bn or 18% of the total debt books.

In addition to a potential interest rate rise, bank lenders are increasingly concerned about the changes in office occupier markets and retail markets. Their lending criteria and risk models traditionally rely on long-term income and are taking time to respond to these changes.

Melanie Leech, Chief Executive, British Property Federation commented:

“It is encouraging to see property lending in 2017 remain consistent with the levels seen in 2016, and it is hugely significant that development funding has reached a new high – with a particular focus on residential. At a time when government is focused on tackling the issues caused by at least 20 years of housing undersupply, this increased investment into creating new, high-quality homes will provide much-needed new homes to support the UK’s productivity, economic growth and social wellbeing.”

Peter Cosmetatos, Chief Executive, CREFC Europe said:

“It is true that broader issues, including regulatory factors, may be skewing lending towards London and away from commercial development in particular. However, it’s good to see a diverse market with more acquisition finance and growth in development lending volumes. In our own work, we have seen enormous interest in build-to-rent among lenders, so the popularity of residential development is no surprise. It’s also encouraging to see sensible LTV levels and strong interest coverage at this point in the cycle.”

Neil Odom-Haslett, President, Association of Property Lenders added:

“The outputs give a fair reflection of what we see with our membership. Our members are active lenders across the UK. LTV’s are stable and for UK lenders the regulatory environment is such that higher LTV’s and development finance becomes more of a challenge. The consensus across the sector is that we are coming towards the end of the current cycle and it is reassuring to see that lenders are, on the whole, taking a sensible approach to lending.”

Tim Crossley-Smith, National Head of Valuation Consultancy, GVA added:

“10 years on from the Global Financial Crisis, the UK commercial property debt market looks to be in good shape with 78% of loan exposure held in loans with an LTV ratio of less than 60%, and loans in default continuing to reduce. With 73% of all outstanding debt due to be repaid in the next five years, interest rate rises and structural changes to some sectors could pose a threat, but the survey highlights the increasingly diverse range of funding sources.”

The Cass UK Commercial Real Estate Lending Report (December 2017) will be available for purchase on the Cass website