New loan origination by UK commercial property lenders reached £22.5 bn (€25.6 bn) in the first six months of 2018, up 27% on the year-earlier period despite Brexit, the latest data from the Cass Business School shows.
The UK Commercial Real Estate Lending Report published on Wednesday found that acquisition financing accounted for 53% of new loan business in the first half.
Seven out of the 12 most active originators were UK banks, while another two were non-bank lenders. In addition, the report found that lenders with balance sheets of £1-5 bn were the most active group, responsible for 45% of new financing.
Of the £22.5 bn of new loans, 61% targeted London and the South East, while 14% related to financing of portfolio transactions across several regions.
Compared with other types of investments, a 10-year analysis of loan default rates (2007-2017) in commercial property lending revealed that the 10-year average default rate (based on value of loans) was 12% across all lenders. This compares to a 10-year BB rated bond.
The highest default rate as percentage of total loan book was reported by investment banks with 29%, followed by smaller UK banks with no substantial branch network and a default rate of 19%.
The report further found that development loans experienced a higher amount of defaults during the last two crisis periods of 1991-92 and 2008-09. The average percentage of value of loan books in default was 16% over a 10-year average for lenders with a high amount of development financing exposure versus 10% for lenders concentrating on investment finance only.
Ion Fletcher, director of finance policy at the British Property Federation commented: ‘The UK's commercial property lending market seems to be in fairly good shape, despite ongoing political uncertainty. However, this report also highlights the relatively higher levels of defaults on development loans versus investment loans.’
He added: ‘Development is inherently riskier, but it is fundamental to the success of our towns and cities - and further policy support from the government, such as better resourced planning teams in local authorities, could help derisk financing for much-needed regeneration and housing delivery.’
Neil Odom-Haslett, president of the Association of Property Lenders, said: ‘The first half of the year has been one of caution amongst lenders and borrowers alike, although there has been some heightened competition amongst lenders for lower leveraged, prime offices (particularly in London) which has put pressure on margins.’
He added: ‘Overall the headwinds have got a little bit stronger and its testament to the current lending culture that as a real estate lending community we are managing them (the headwinds) appropriately.’
