New lending activity drops by nearly a quarter

By James Buckley - Wednesday, October 11, 2017 8:59

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New lending activity in the UK commercial property market has dropped by 24%, showing the extent of lenders under strain as a result of the rise in property acquisitions that do not require debt.

The 2017 Mid-Year De Montfort Commercial Property Lending Report, the most comprehensive study of the UK’s commercial property lending market, shows that new loan origination has decreased from £23bn, in the second half of 2016, to £17.6bn in the first half of 2017.

When comparing the figure with the first half of 2016, in which £21.4bn of new loan originations were completed, this represents a year-on-year decline of 18%.f

Insurance Companies and Nortfh American banks retrenched particularly sharply from new loan origination, while Other Non-Bank Lenders were the only lender group to buck the trend, increasing their new loan origination volume by 9% from year-end 2016. Their share of all new origination grew from 10-16%.

Despite the decline in new lending, the total value of committed debt identified by this research at mid-year 2017 remained stable at £191.4bn, including both drawn and undrawn amounts, and total drawn debt increased by 0.8 per cent from year-end 2016 to £166bn.

Mirroring the findings from year-end 2016, the data continues to evidence stark regional disparities. A total of 42 per cent of new loan origination was allocated to Central London and another 11 per cent to the rest of the South East. A total of 47% targeted other regions, mainly key city centres such as Manchester, Birmingham, Glasgow, Leeds and, to a lesser extent, Bristol.

The report also shows that market liquidity remains strong, with particularly competitive pricing and lending terms for prime property, with some margins below 200bps for loans at 60 per cent loan to value (LTV). German and North American banks, which are subject to different lending rules than UK banks, continue to offer the most competitive pricing. The overall average LTV for deals in the first half of 2017 was stable at around 58 per cent across property types.

After years of limited lending to commercial development, the first half of 2017 saw the share of new debt allocated to such projects more than double from five to 11 per cent.

While just over half of all lenders report concerns about property market fundamentals – and many expect values to fall over the next 12-18 months – 78 per cent of them are positive about the second half of 2017 and intend to increase new loan origination in that period.

Ion Fletcher, Director of Finance Policy, British Property Federation commented: “The overall impression is one of caution among lenders, but the market remains competitive and there are no signs of panic. It is heartening to see more commercial development lending taking place, although the continued focus on London and the South-East – driven partly by lending regulation – is really something that policymakers should pay more attention to if they want economic growth spread around the country.”

Ian Malden, Head of Valuation, 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.

“The trend for lower loan to value ratios continues as a result of greater regulation and general caution, albeit with some lenders appearing to be shifting their sector focus towards development opportunities in pursuit of higher returns."

Peter Cosmetatos, Chief Executive, CREFC Europe added: “The research is consistent with anecdotal reports of a market that is quiet in terms of transactions but mostly functioning. Lenders are being sensibly cautious – witness the reported average LTV of just 58 per cent at a time widely regarded as being late in the cycle.  The fact that Other Non-bank Lenders feature for the first time on the list of the top 12 lenders shows the diversity that now characterises the UK commercial property lending market.”

Mario Berti, CEO of Octopus Property, the specialist lender, said: “The De Montfort data showing an increasing market share for specialist lenders like ourselves does not come as a surprise, as we have been transacting record volumes of late. This is a trend that we expect to continue because traditional lenders struggle to compete with the new breed of specialist lenders. Borrowers increasingly want flexibility, speed and a much more bespoke level of service which specialist lenders understand and respond to. Overall we remain upbeat about the market prospects.”

jbuckley@costar.co.uk

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