At the launch of the De Montfort Commercial Property Lending Report a few weeks ago, Bill Maxted concluded that the debt market appeared to have returned to a good state of health.
Maxted, the report’s author, produced plenty of evidence to back this up: a growing volume of lending, a widening range of lenders, a smoother maturity profile and a dwindling backlog of legacy debt. The overall amount of outstanding debt ticked up for the first time since 2008, no doubt leading some to question whether the seeds for the next crisis were already being sown. Yet, despite a run of good years for commercial property, lending practices on the whole remain markedly more conservative than a decade ago. Average LTV ratios on new lending last year ranged from 60% to 65%, a far cry from the 70-80% that was the norm in 2007.
However, a striking feature for me was the dramatic divergence in the availability of finance for central London and for the rest of the country. At the end of 2015, 43% of total outstanding debt was secured against central London property, up from 38% the previous year. More striking still, at the onset of the financial crisis central London accounted for only about a quarter of the total. This implies that the amount of debt secured against central London assets is higher now than at the peak of the last cycle. In stark contrast, the volume across the rest of the country has declined by half over the same period and continued to fall last year.
Certainly, up until the end of last week it was probably fair to say that buyers of high-value prime assets in the capital had never had it so good in terms of access to finance, with a wide range of lenders competing for business in that space and all-in financing costs that were probably lower than they had ever been. In the De Montfort survey, 34 lenders said they had originated loans of at least £100m in 2015, and 39 said they would be prepared to lend to that level. Loans of more than £100m are almost exclusively secured against assets in London and demonstrate the eagerness of a whole range of lenders to finance deals in the city.
Fewer than half the respondents said they would be prepared to make loans of £5m or less, yet deals of this size represent a very significant part of the property market outside London. Auction room volumes, up 40% year on year, demonstrate the strength of investor demand in this space. At Royal Bank of Scotland, we are striving to ensure that, through our UK-wide network of local teams, we are able to offer small investors in regional markets the support that larger investors in London take for granted.
In fact, it is prudent to ask to what extent this abundance of liquidity in central London is influencing values. Clearly, demand from equity leads demand for debt, but, as an industry, we might consider whether allocating such a large proportion of our capital to one market after such a prolonged period of rising values is in our best interests.
Alongside other stakeholders, we are working with the Property Industry Alliance to investigate how alternative valuation methodologies might serve to offer a view of a sustainable value at extremes of the cycle. Indeed, at RBS we already study a range of metrics to understand what factors are influencing values and to help inform our through-the-cycle strategy. One such measure shows that capital values in central London offices are currently around 50% above their long-term real trend – a greater premium than was recorded in 2007.
Of course, many of our clients are very experienced investors in central London, taking a long-term perspective and creating value through asset management. We continue to support them in that strategy. Nonetheless, there are a wide range of local markets across the country with robust fundamentals that represent a good opportunity for those prepared to seek them out.
We believe that our presence in these markets can make a real difference to businesses that may not be so well served by the lending industry at large.
I referred indirectly to the EU referendum above and, as I write, the market is still very much finding its feet. But I am confident that the blanks will start to be filled in quite quickly. One of the lessons of the referendum was the difference in sentiment between the various parts of the UK. If we are to succeed as a nation post-Brexit, then there is no doubt in my mind that the trends indicated in the De Montfort research are absolutely relevant, and that our financial institutions must continue to provide liquidity across the country rather than retrenching to the capital once more.
Paul Coates is managing director, real estate finance, at Royal Bank of Scotland
