UK real estate lending held up in the first six months of 2019 thanks to a high proportion of refinancings, while acquisition finance was down in line with a quieter UK transaction market ahead of Brexit, the latest report from the Cass Business School shows.
New loan origination reached £23.3 bn (€26.8 bn) in the first six months in 2019, against a low of £21 bn 12 months earlier, according to the Cass Business School UK Commercial Real Estate Lending Report. Most debt originations were the result of refinancing and restructuring activity while only 39% of new debt was used to finance property acquisitions, leaving the debt market at the risk of overheating.
Another indicator for some change in market dynamics was seen around secondary loan distribution; while syndications were slow, the securitisation market has picked up significantly as an exit strategy. During H1 2019, the securitisation market announced six new UK deals, with another five in the pipeline. However, of the total £4.5 bn of transactions which were securitised, only £3 bn were sourced from newly originated loans, with the remainder constituting seasoned loans from 2017-2018, still making room on balance sheets for new loans.
Outstanding development finance stood still, but undrawn facilities increased to £27 bn during the first six months of 2019 from £22 bn at year-end 2018. This indicates a further amount of development finance is available for drawdown later this year.
Pricing of loans remains extremely competitive for prime London office properties, ranging from 140–200 bps within the 25th and 75th percentile. Pricing for loans against secondary properties and locations remains 80-100 bps wider than prime, especially loan pricing against secondary retail property which remains above those of other asset classes, reaching 330–600 bps for relatively low LTVs( 45–55%).
On an annual return basis, a five-year fixed rate CRE senior secured loan generated a return of 2.9% compared to a five-year gilt with a return of 0.5% and UK corporate investment bonds at 1.4–1.7% in June 2019, which makes it still one of the most attractive investments in the current market. However, some lenders are experiencing pressure on loan performance on loans against secondary retail assets, and correct risk pricing is crucial.
Peter Cosmetatos, CEO of CREFC Europe said: 'This report confirms the growing structural importance of less mainstream lenders. Not only does the research show the outsized role played by Other Lenders (and smaller lenders more generally) in higher LTV lending. It also shows that, with the activity of Insurers and UK and German Banks dominated by refinancing, Other Lenders and smaller lenders (along with Other International Banks) are also providing a disproportionate amount of the acquisition finance available to the market.'
Neil Odom-Haslett, president of the Association of Property Lenders said: 'The first six months of 2019 have been challenging due to a number of reasons, notably, the lack of transactions, the structural changes to the retail sector, the uncertainty that Brexit has bought and many lenders being in “risk-off” mode. Notwithstanding these headwinds, real estate lenders have had an incredibly busy first half as they refinance their legacy loan books and reposition some of their retail lending.'
