Bank lending against commercial property continues to grow

October 16, 2019

  • New loan origination reached £23.3bn for the first six months in 2019, against a low with £21bn 12 months earlier
  • Lending margins against prime London offices continue to be under pressure, falling to 196bps in June 2019, especially for international lenders who have been fighting hard for winning transactions, reducing margins in H1 2019 at low LTV levels
  • UK bank loan books ending on a high in June 2019

According to the Cass Business School UK Commercial Real Estate Lending Reportauthored by Dr Nicole Lux,new lending for H1 2019 was four per cent ahead of volumes reached twelve months earlier, at £23.3bn.  Against this Costar recorded £23bn of property transactions over the same period, resulting in £1 of new debt originated for every £1 of property value transacted.

The long-term ten-year average has been 74 pence of new debt per £1 of property value, indicating that most debt originations were the result of refinancing and restructuring activity. As such only 39 per cent of new debt was used to finance property acquisitions, leaving the debt market at the risk of overheating.

Another indicator for some change in market dynamics was seen around secondary loan distribution; while syndications were slow the securitisation market has picked up significantly as an exit strategy. During H1 2019, the securitisation market announced six new UK deals, with another five in the pipeline. However, of the total 4.5bn of transactions, which were securitised, only £3bn were sourced from  newly originated loans, the remainder were seasoned loans from 2017- 2018, still making room on balance sheets for new loans.

Outstanding development finance stood still, but undrawn facilities increased to £27bn during the first six months in 2019 from £22bn at year-end 2018. This indicates a further amount of development finance is available for drawdown later this year.

Pricing of loans remains extremely competitive for prime London office properties ranging from 140 – 200bps within the 25th and 75th percentile. Pricing for loans against secondary properties and locations remains 80- 100bps wider than prime, especially loan pricing against secondary retail property remains above those of other asset classes reaching 330 – 600bps for relatively low LTV’s 45 – 55 per cent.

On an annual return basis a five-year fixed rate CRE senior secured loan generated a return of 2.9 per cent compared to a five-year gilt with a return of 0.5 per cent and UK corporate investment bonds at 1.4 – 1.7 per cent in June 2019, which makes it still one of the most attractive investments in the current market. However, some lenders are experiencing pressure on loan performance on loans against secondary retail assets, and correct risk pricing is crucial.

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