The UK lending market has remained more active than property investors in 2018, according to Cass Business School.
The Cass Business School UK Commercial Real Estate Lending Report (formerly produced by De Montfort University) found that new lending for 2018 was 12% ahead of volumes reached twelve months earlier, at £49.6bn (€44.21bn).
The survey, which collects data from 80 banks, insurance lenders and debt funds, showed that average five-year senior lending margins continue to be under pressure, falling to 174bps from 188bps for loans secured against prime office property.
Junior pricing has adjusted upwards by 30 -40 bps across property classes, offering yields of 9.2%.
Nicole Lux at Cass Business School and author of the report said the industry had been watching this lead indicator, which has previously marked significant turning points in the market.
Debt supply usually lags borrower demand by one year and 2017 was a strong year for property transactions, Lux said.
“It remains to be seen if the debt market was just catching up in 2018. Historically a relationship of 1:1 could easily lead to an overheating market and 2019 needs to be carefully monitored.
“This is also confirmed by an increasing share of new loan origination against outstanding loan books, which reached 29% of turnover in 2018 compared to a ten-year average of 20%.”
Lux said a relatively large amount of 26% of new loans was distributed via loan syndication, showing market depth and breadth are widening.
The report shows new development finance reached £8.8bn, of which the majority of £5.2bn was for residential development supplied by UK Banks and other lenders. This is £1bn less new residential development finance than in 2017.
Lenders also mentioned that developments of private rented sector projects are still difficult to finance and these made up £1.7bn, according to the report.
The report said while loan pricing was stable with some slight downward pressure for loans secured by prime property and low loan-to-value ratios, pricing of loans secured by prime retail property increased to 233bps from 214bps over twelve months to December 2018 and for secondary to 334bps from 285bps.
This leaves loans secured by retail property to be the “most expensive property type to finance, due to credit concerns over the quality of retail income,” the report said.
Paul Coates, head of debt and structured finance at CBRE, said: “The market in 2018 remained robust, despite continued political and economic uncertainty, with increased capital looking to deploy into the debt space.
“This, in turn, has created greater competition amongst lenders with borrowers seeing more favourable terms across many asset classes. However, how long this lasts remains to be seen.”
Peter Cosmetatos the CEO of CREFC Europe said the headline seems to be that the UK property lending market is stable and sober, providing the credit the UK market needs without lenders taking on undue levels of risk.
“If there is to be any serious Brexit impact on this market, it certainly hasn’t emerged yet.
“What is already clear, on the other hand, is the demise of retail property, which now accounts for just 15% of the collateral for the debt covered by the report – it remains to be seen how investors and lenders can work their way through a very challenging situation.”
Neil Odom-Haslett, president of the Association of Property Lenders said: “The survey clearly demonstrates that the lending community is managing its commercial real estate lending books in a responsible and disciplined fashion and that the capital regulations imposed on lenders by the authorities following the global financial crisis are actually working.
“The peaks and troughs of the lending market, with the peaks usually at the wrong end of real estate cycles, are hopefully in the past and history will not repeat itself (well, not during this cycle at least!). In this respect “benign” is good.”
Ion Fletcher, director of finance and commercial policy at the British Property Federation, said the overall picture appears to be one of stability in the commercial property lending market, with the amount of new lending and average lending terms in line with recent years.
“However, it is surprising that despite the significant growth in the UK’s build-to-rent market over the last couple of years, lending against build-to-rent development projects seems to remain muted.
“Clearly, regulatory and commercial barriers remain that really need to be overcome to maximise the contribution of build-to-rent in addressing the UK’s housing shortfall.”