Lending to the UK real estate market dropped 34% in the first half of 2020 as the coronavirus pandemic took hold.
New lending was just £15.5bn compared to £23.3bn in the same six month period in 2019, with 22% of lenders choosing to do no new business at all.
The latest Mid-Year Business School (formerly Cass) Commercial Real Estate Lending Report says the debt market cycle is at a new inflection point with the downward trajectory also characterised by rising margins, lower LTVs and smaller tickets as well as shrinking origination volumes.
Only £6.7bn of the new business (43%) was acquisition finance with £8.2bn being refinancings (53%) and the balance extensions of existing loans.
Margins across property types rose by between 20 - 50 basis points and loan to values available for senior debt declined again to a historic low of an average 50-55%.
Dr Nicole Lux, the report’s author, emphasised that the report merely captures the first visible and short-term effects of the pandemic and said that it is still too early to pick up signs of financial distress.
Unlike the aftermath of the global financial crisis, few lenders are testing valuation covenants and they are not pushing for administrations. “It is like a standstill. Everybody is working with their existing borrowers, extending, providing interest rate holidays and taking it step by step, either quarterly or semi-annually,’ Lux told PropertyEU.
‘However, I do not think we have seen the trough yet in terms of low transactions and origination and rising margins. Valuations have been delayed and properties still have to be repriced.
‘I think it is clear that we will not see distress until Q3 and Q4 of 2021. Like any crisis it will weed out bad borrowers or over-leveraged properties or landlords who don’t have the cashflow or the equity.’
Lenders that did not do any business included 7 banks - both German and UK - and 10 non-bank lenders, mainly debt funds.
Lux said smaller or ‘one-off’ debt funds were ‘struggling’. Debt funds with large balance sheets behind them owned by big institutions or fund management platforms ‘keep expanding because they have refinancing business and constant funding lines,’ she said.
‘Another trend we have seen is the large American investment banks coming back in this period. They are always an interesting indicator when things become distressed or large complicated portfolios come on the market. These banks dip in and out of Europe and the UK and they disappeared when pricing was extremely tight and German banks were happy to write really big tickets.’
Retail is a continuing problem. Only seven of the 76 responding organisations said they were willing to look at new financing requests for secondary retail. Lenders have had to extend existing loans secured on retail which could not be repaid or refinanced elsewhere.
‘Over the next two years we estimate that £9.5 billion of retail assets and a further £13.5 billion of alternative assets like student housing, hotels and care homes need to be refinanced. Many facilities will be at 85 to 120 per cent LTV at that time,’ Lux said.
Mirroring the equity investing market which has seen investors channeling more capital into private residential rental, it was residential investments which attracted the most financing in January-June 2020, at 29%. Offices were second at 24%.
Lux said overall the share of origination by banks was holding steady at about 70% with 25-30% of the market comprising debt funds and insurance companies.
The London business school has chosen to drop the Cass name because of founder Sir John Cass’s links to the slave trade.
