FINANCE: The total value of outstanding debt held against UK commercial property fell by 9.1% to £179.8bn last year as banks continue to repair their balance sheets.
According to the De Montfort University Commercial Property Lending report for 2013, at the end of the year the total value of outstanding debt was £198.4bn, including around £18.6bn secured by social housing.
This is down from a high of more than £270bn in 2008 immediately following the 2007 property crash.
As well as revealing the close to 10% reduction in the UK’s debt pile, the report revealed a significant shift in the underlying quality of the loan book.
Surveyed lenders reported that 50% of their loans are now secured on prime property, up from 42% last year.
In addition, the LTV profile of legacy debt secured against investment assets markedly improved; of the outstanding debt, 63% had a LTV ratio of 70% or less, compared to 53% in the previous year.
The volume of debt with a LTV ratio of over 101% decreased from £46bn to £30bn.
However, the value of loans deemed to be in default increased from £21.5bn in 2012 to £24.5bn in 2013, although the number of loans in default fell.
The study showed the continuing trend for growing confidence among both lenders and borrowers, a greater availability of finance, and increased diversification among lending institutions, with the role played by non-bank lenders such as insurance companies and debt funds becoming more pronounced.
New lending in 2013 totalled £29.9bn, up from £25.5bn in 2012, and the report showed that 60% of organisations intended to increase the size of their loan books, compared with 46% last year. The average LTV ratios of new loans slowly crept up from 64.2% to 65.9% in 2013, and for the first time in several years, lenders indicated that they would be willing to lend against speculative commercial development.
The gradual increase of LTV for new lending was mirrored by a separate study of requests for commercial mortgages from borrowers, also published today.
Laxfield Capital’s debt barometer found that borrowers sought loans with an average LTV ratio of 58% in Q4 2013 and Q1 2014, compared with 51.8% in the first three quarters of 2013.
The De Montfort study also revealed signs of greater diversification among lenders.
The 12 largest bank lenders held an aggregated 72% of outstanding market debt in 2013, significantly lower than the 83% that was recorded in 2009, while non-bank lenders accounted for 23% of new loans in 2013, compared with 15% in 2012.
The report showed a continuing decline in the proportion of outstanding debt held by UK banks and building societies from 57% to 55%.
The price of loans provided by non-bank lenders eased from 225-800bps to 175-400bps, demonstrating that the sector is becoming more competitive and increasingly represents a credible alternative to traditional sources of debt.
The report concluded that a predilection for banks, building societies and insurance companies to favour large loans indicates that there is a much more diverse and competitive environment for larger loans than small ones.
Only 11 of the respondents said they would be prepared to write a loan of £5m or less, whereas 30 would be prepared to write a loan of between £51m and £100m and 25 at above £100m.
Liz Peace, chief executive of the British Property Federation, said: “There has been a general feeling of improving credit availability in the past 12 months and this year’s report bears that out. Recovery post-crash has been slow but steady, and it is promising to see that the market is now moving in the right direction.
“The banks seem to have significantly patched up their balance sheets and problem loans are being resolved, freeing up capital for new lending.
“We are also delighted to see that non-bank lenders are becoming a significant part of the market, suggesting we are moving towards a more balanced provision of real estate debt in the UK.”
Chris Holmes, head of UK debt at JLL Corporate Finance, said: “It is pleasing to note from the report that the UK CRE financing market reached the crossover in 2013 where balance sheets became materially cleansed of legacy positions, lowering overall credit risk.
“At the same time, resurgent and new sources of debt brought a new equilibrium between borrowers and lenders after the previous years of drought.
“Unsurprisingly, we noted that margin pricing has on average declined significantly and early indicators demonstrate that this continues albeit in a slower rate in Q1 2014 for the most prime assets.
“Borrowers now have the genuine choice of lending partners at every part of the risk-reward spectrum and across all asset classes.”
bridget.o’connell@estatesgazette.com
