The UK’s main banks breezed through the Bank of England’s latest round of stress tests.
But with commercial property’s role in the financial crisis still tainting the sector, some wonder whether debt is back driving the market.
The message from Commercial Real Estate Finance Council members is that lenders are lending furiously, but maintaining discipline, especially on loan-to-values. Colliers International’s Global Investor Outlook suggested we may be about to enter the “debt phase” of the cycle as investors respond to yield compression. But I have not seen much evidence of that.
Neither, it seems, has the Bank of England. Governor Mark Carney has told the European Parliament’s economic and monetary affairs committee that UK property value increases have principally resulted from large influxes of overseas money, rather than excessive lending. The bank’s December Financial Stability Report said the use of leverage, particularly in London, had “begun to increase a little over the past year or so” – plainly something to watch, but not a cause for concern at this stage. It also mentioned the bank’s engagement with industry on the loan database and long-term value recommendations from the Real Estate Finance Group’s Vision report.
The bank’s measured tone and broad perspective are encouraging; but this raises a different question, about the strength and breadth of the property recovery. Are property lenders reaching the parts they missed during the financial crisis – particularly privately owned stock outside London? There isn’t much hard data to go on when the focus is higher yielding and lower ticket size properties that are not in institutional hands (and therefore aren’t captured by IPD).
While it doesn’t provide a perfect proxy for regional markets, it is telling that CBRE’s capital values index shows high-yielding property in the doldrums until late 2013 (more than four years after the “all property” trough in 2009), with only an anaemic recovery into 2015. This rather bleak picture is almost certainly a result of both a persistent lack of available finance due to a combination of market structure and regulation, and weak demand as occupational markets struggled.
Unlike, say, Germany, the UK no longer has a network of regional lenders to cater to local business needs. While the clearing banks might want to use their branch networks for regional property lending, there is anecdotal evidence that the “slotting” regime that sets their regulatory capital has made it difficult for them, skewing their focus towards larger deals in the bigger centres. As for challenger banks and non-bank lenders, their teams and balance sheets are mostly small and often London-based. As a result, their capacity for writing lots of regional property loans is limited.
Finance remains particularly elusive for borrowers with low-value assets, unrated tenants and short leases, and for those wishing to reposition or develop assets on a speculative basis outside core markets. That reflects the broader problems still affecting the availability of credit for SMEs, which prompted George Osborne and Mark Carney to announce a two-year extension of the Funding for Lending scheme.
But there are signs things may be improving. The most recent edition of Laxfield Capital’s debt barometer identified “very strong activity nationally”, including growing demand for sub-£5m loans. Regional demand has outstripped London for the first time since 2012, it said – and whereas back then borrowers were desperate to refinance, today most of the demand is for acquisition finance. That, in common with growing appetite for development finance in the regions, suggests a return to health may be on the cards.
Will lenders step up to meet this demand? Pretty much everyone on the lending side – from the clearing banks through private equity funds to peer-to-peer platforms – seems interested. And so they should be, given the diminishing risk-adjusted returns available in core markets. The relative lack of competition for regional and smaller ticket lending presents a real opportunity but, if it isn’t taken, could yet prove a barrier to Britain’s growth. It remains to be seen whether lenders can overcome their infrastructure, staffing and regulatory constraints and bring some cheer to the regions.
Peter Cosmetatos is chief executive of Commercial Real Estate Finance Council, Europe
