Loan origination for UK property fell 24% to £17.6bn in the first half of 2017, according to the mid-year De Montfort Commercial Property Lending report.
Volume was down from both the second half of 2016, when £23bn of new loans were completed, and from £21.4bn on a year-on-year basis.
North American banks have been the most cautious lenders, originating only £652m in loans in the first half of the year – down a substantial 64% from £1.8bn in H2 2016. Their market share halved from 8% to 4% in six months.
UK banks have also slowed down, completing £8.1bn in loans – a fall of 28% from the end of 2016. Year-on-year, the drop has been more subdued at -14%.
By contrast, alternative lenders continue to increase both their activity and their market share. Other non-bank lenders were the only group to have growth in consecutive six-month periods, rising from £1.8bn in H1 2016 to £2.6bn in H2 and £2.9bn at the start of 2017. In the first half of the year, its origination market share spiked from 10% to 16%.
The first half of 2017 was notably the first time that alternative lenders made the list of 12 most active players in the market who, between them, undertook 61% of all new loan originations.
Although volumes fell, the report suggested that lenders are not panicking. Nearly a quarter of all new origination went into development finance as lenders targeted greater income on margins. However, lenders have shown caution regionally, with 42% of all new loans allocated to central London and 11% to the rest of the south east. The rest was split largely between Manchester, Birmingham, Glasgow, Leeds and Bristol.
Ian Malden, head of valuation at Savills, said: “With fewer commercial investment transactions in the market requiring debt, it is perhaps unsurprising that the quantum of new loan originations declined in the first half of 2017.
“However, both the commercial property and lending markets appear to be fairly resilient in the face of political and economic uncertainty, with a continuing focus amongst many lenders for the best assets, most notably in the high value locations of London, the South East and the large regional cities.”
Competitive caution
LTV ratios have been on a downward trajectory for years, continuing into 2017 when 93% of loan exposure was held in loans up to 70% – a ten-year low. The average LTV for deals completed in the first half of the year was 58% for senior prime office loans.
The decline in margins reversed this year, rising 11bps to 209bps for prime offices. Still, German banks offered 170bps for loans to the sector and North American banks offered 189bps. Competitive pricing was also available for the super prime end of the market, where average margins were below 200bps for all lenders.
Lenders targeting PRS
The expansion of PRS in the UK has meant that 25 lenders offered finance terms for residential investment in the first half of 2017, compared to just 17 at the end of 2016. Loan margins were an average 274bps, with alternative lenders offering the highest margins at 500bps and insurance companies offering 180bps.
However, no German or “other international” bank showed interest in the sector, which the report said was due to a lack of suitable product.
To send feedback, e-mail karl.tomusk@egi.co.uk or tweet @ktomusk or @estatesgazette
