The UK real estate debt market is in good health and is likely to be resilient in the face of unstable conditions, according to the half-year De Montfort Commercial Property Lending Report.
Origination of new loans fell by 13% year-on-year to £21.4bn in the first half of 2016 as transactional activity decreased and the overall debt outstanding for the sector edged up by only 3% to £173.4bn.
Overleverage across the real estate market made the financial crisis of 2008 a disaster for the industry, but its approach to debt is now far more prudent.
The large majority (89%) of loan exposures now have a loan-to-value ratio of 70% or less, while only £4.5bn of loans, or 2.6% of the total aggregated loan book, was in breach of financial covenants or in default. The average LTV provided by UK banks and building societies also fell to 59% from 65.6% LTV at the end of 2015.
Margins tightened during the period, with prime office rates hitting 191bps, a fall of 31bps since the end of 2015.
This is likely to be the reason why UK lenders increased the size of their market share, while US lenders – often looking for more opportunistic margins – retreated somewhat.
UK banks and building societies increased their share of the market from 34% at the end of 2015 to 44% while American banks saw their share decline from 14% to 7% and the share of insurance companies, which were the second largest category of new loan originators in 2015, declined from 16% to 10% in the first six months in 2016.
However, since the end of the half-year and the result of the EU referendum, margins are broadly acknowledged to have widened again.
Access to development finance also appears scarce with only 11 organisations providing data for finance of fully prelet development to De Montfort at mid-year 2016 compared with 18 at mid-year 2015. As a result it also became more expensive – the average interest rate margin was 348bps at mid-year 2016, an increase from 339bps reported at year-end 2015.
Ion Fletcher, director of policy (finance) at the British Property Federation, said: “The lending market seems to remain relatively unchanged with moderate LTV ratios. However, the lack of funding for development remains a problem, and the report also suggests that lenders are lending against a narrower range of property than in the past, which suggests that recent regulatory changes may inadvertently be driving concentration risk among lenders.”
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