The UK commercial real estate lending market recorded a decline in lending activity in 2020 due to the impact of business lockdowns during the pandemic.
The latest Business School (formerly Cass Business School) UK Commercial Real Estate Report showed that new lending in 2020 fell 23% from a year earlier, as a result of the coronavirus pandemic.
Despite some improved origination activity in the second half of 2020, the market lagged behind volumes reached in 2019, reaching just £33.6bn (€38.8bn), the report said.
While the first half of 2020 had already indicated considerable dislocation in lending markets, the continued impact of business lockdowns during the pandemic continued to slow down market activity into the second half of the year, the report said.
Lending activity was dominated by loan extensions and refinancing which accounted for 57% of all new lending. Margins rose across all property types by between 20 and 80 basis points apart from logistics.
The report said the residential development pipeline still remains high, especially for the private rental sector – with a total pipeline of £16.7bn. In total 20% of lenders’ loan books are backed by some form of residential asset and 28% by office property.
The survey – which collects data from 78 banks, building societies, insurers and other lenders – also revealed that the amount of defaulted loans increased from 3.2% at the end of 2019 to 4.6% in December 2020.
Nicole Lux a senior research fellow at the Business School and author of the report said loan book quality differs substantially across different lenders, and it has become particularly apparent that lenders with loan books up to £1bn have generally lent against assets of lower quality.
“We predict that real estate lending will become more expensive and require further capital for borrowers across the next two to five years, due to increasing maintenance and improvement requirements to meet environmental, social and governance standards, necessary conversions or repurposing and increased capital costs of banks.”
Peter Cosmetatos, CEO, Commercial Real Estate Finance Council Europe, said: “Against the predictable backdrop of lenders focusing on existing customers and stress within existing loan books, a striking theme is the attraction of new construction.”
Cosmetatos said development finance comprised 28% of new origination in 2020 (it accounts for just 13% of total loans outstanding).
“Far from an expression of boom-time exuberance, this seems an understandable response to highly uncertain times as lenders seek to look beyond the pandemic.
“It might also be seen as recognition of the threat posed to many existing buildings by obsolescence resulting from changing social and economic needs or the decarbonisation agenda. Overall, lenders performed well during a year of quite extraordinary challenges – but more challenges undoubtedly lie ahead,” Cosmetatos said.
Neil Odom-Haslett, president of Association of Property Lenders, said: “For those of us at the coalface of commercial real estate lending, 2020 was an incredibly challenging year. Managing loan books and trying to keep all stakeholders ‘happy’, was a very difficult balancing act.
”However, against this backdrop to see new lending down by ‘only’ 23% is a remarkable achievement and to me as a lender, demonstrates how proactive, responsive and responsible, the lenders have been.”
Aparna Sehgal, partner, Dechert, said: “The levels of commercial real estate market activity in the second half of 2020 was a pretty accurate reflection of the socio-economic climate of the time: cautious and subdued.
“The unprecedented coordination of fiscal and monetary policy, together with pent-up demand, should, however, result in a substantial bounce-back in economic activity in the second half of 2021 and beyond.”
Paul Coates, the head of debt advisory and structured finance at CBRE Capital Advisors, said the key theme coming out from the report is one of forbearance and caution from lenders, until the specific economic impact is clearer in terms of occupational demand, impacts on sustainable cashflow and valuation.
“There is a very large divergence in liquidity (and pricing) from lenders for core, long let assets versus assets and sectors considered more vulnerable to those structural changes which have been accelerated by the pandemic.
“As we head towards the summer, and into the second half of the year which will hopefully see the opening up of society and the economy, it will be interesting to look forward to that returning confidence and transaction volumes,” Coates said.
Michael Kavanau, the head of EMEA debt and structured finance, JLL, said: “With the pandemic causing significant business disruption and uncertainty over the past year, it is unsurprising that the Business School report has identified a sharp decline in new lending activity as lenders and sponsors assessed the impact for the real estate market.
“However, we have been buoyed by the speed and diversity of liquidity returning to the market, as confidence returns along with the successful roll-out of the vaccine programme.”
Tom Brook, director, debt and structured finance at JLL, said: “The report highlights the significant disruption witnessed in 2020 as the market digested and assessed the short and long-term impacts of the pandemic.
“With a number of traditional lenders moving to ‘risk-off’ in the face of increased uncertainty, we have continued to see the expansion of alternative lenders who have been able to step in and provide critical liquidity to the market over this period.”
To read the digital edition of the latest IPE Real Assets magazine click here.