The total volume of new lending to UK property fell by 17% last year, from £53.7 bn in 2015 to £44.5 bn, as investment transaction activity was affected by the EU referendum vote.
According to the 2016 year-end De Montfort Commercial Property Lending Report, published on Thursday, volumes were buoyed by a shift to more refinancings of existing loans, which accounted for 61% of all new lending last year.
By contrast, in 2015 - which was the post-crisis peak for both UK investment transaction volumes and new loan origination - 55.6% of debt issued was for new acquisitions.
In line with the relative increase in refinancings versus acquisition finance, UK banks and building societies - which tend to have the biggest client relationship bases - increased their market share of new loan originations to 45% compared with 34% in 2015.
This group of lenders was also responsible for 44% of commercial development funding and 69% of residential development financing, completing £5.4 bn of development lending transactions during 2016 out of a total £7.7 bn.
Interest rate margins flat
Average interest rate margins ended the year broadly flat after initially falling slightly early in 2016 to a post-crisis low and then picking up during the second half. Margins for prime offices however, ended 2016 down 25 basis points, at 198 bps compared to 223bps at the end of 2015.
Reflecting lenders’ caution, average maximum loan-to-values fell during the year, to 59% for prime office senior loans (65.6%), while average LTVs for secondary property for all main asset classes declined to under 60%.
One noteworthy trend was the concentration of lender activity on London and the surrounding region, with almost two-thirds of all debt secured against property in the capital and the South East. Industry body the British Property Federation, one of 13 sponsors of the report, flagged this as a possible issue.
London focus
Ion Fletcher, the BPF’s director of finance policy, said this was a trend 'that could be important from a policy perspective.' Together with the high cost and 'relative dearth' 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', he said.
Neil Odom-Haslett, president of the UK’s Association of Property Lenders, said: '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.'
The slow recovery in the health of banks’ UK books since the global financial crisis continues, with 91% of outstanding loan exposure now held in loans at LTVs at or below 70%. Loans in default, reported to the research, were £2.6 bn, or 3% of the total (£10.4 bn and 7% reported at the 2015 year end).
The proportion of legacy debt still hanging over since the time of the GFC is now at 'an insignificant level' the report says.
