While new lending was down by 17% compared to its post economic crisis peak in 2015, the vote to leave the European Union had a minimal impact on new lending activity, according to the De Montfort commercial property report.
Lenders originated £21.4 billion in the first half of 2016 and a marginally higher £23.1 billion in the second and in a shift from 2015, where 55.6% of debt issued was for new acquisitions, 61% of new lending in 2016 was refinancing for existing loans, which is felt to benefit lenders with a large existing client base.
UK banks and building societies increased their market share of new loan originations to 45% by the end of 2016 compared with 34% in 2015. While some non-bank lenders were also able to increase their market share, most categories of lenders, including North American banks and insurance companies, recorded a decline in market share.
The report also points out that they were responsible for 44% of commercial development funding and 69% of all residential development funding. In total they completed £5.4 billion of development lending transactions during 2016. The total development funding supplied by all lenders was £7.7 billion.
Market liquidity remained strong, with competitive pricing and lending terms for prime property. While average interest rate margins fell slightly over the course of the year, they picked up during the second half, suggesting an end to the trend of falling margins observed since 2012.
Average maximum loan to value ratios declined during the year by around 5% for prime office senior loans and the average ratio for senior loans secured by secondary property was by the end of the year below 60% for office, retail and industrial property.
Geographically, the data highlights significant regional disparities with 63% of the total debt secured against property in London and the South East. This compares with 12% for the North, 11% in the Midlands and Wales and 4% in Scotland.
‘The apparent stability of the lending market masks a couple of underlying trends that could be important from a policy perspective, namely the continued rise of debt secured against London property, which now represents almost half of the outstanding total, and the continued relative dearth and high cost of development finance,’ said Ion Fletcher, director of finance policy at the British Property Federation.
‘These contrast with the Government’s objectives to promote economic growth across the whole country and stimulate new development activity, particularly for new homes. If these trends are driven by regulatory factors, policymakers should be thinking about how to mitigate them,’ he added.
According to Neil Odom-Haslett, president of the Association of Property Lenders, lenders as a rule don’t like uncertainty or surprises and, over the last 12 months, there has been a fair share of both. ‘As a result, it is clear that the lending community has become more cautious. The bias towards lending in London and the South East continues, and development finance remains scarce, and this will not change in the short term, unless of course the regulators and policymakers intervene in some way,’ he pointed out.
Chris Holmes, EMEA head of debt advisory at JLL, believes that the current trend is likely to continue. ‘The market reached a new equilibrium at the end of 2016. Established banks were operating cautiously post referendum with a tendency to lower leverage and higher margins. This gave a clear signal to non-bank lenders who continue to increase market share by taking stretched senior risk and development risk in return for higher loan margins,’ he said.
‘We anticipate a continuation of this trend, particularly as it is difficult to secure development funding at reasonable margins on anything other than the most conservative deal structures. If the forthcoming election returns a more stable political outlook, it is possible that the strong supply of liquidity to commercial real estate finance will reverse margin increases seen since June 2016,’ he added.