De Montfort University’s annual study of the UK’s commercial property lending market reveals that despite the uncertainty caused by the European referendum, 2016 was another positive year for the UK real estate debt markets.
Supported by GVA as well as other leading property, financial and legal firms, the De Montfort Commercial Property Lending Report shows that the total amount of outstanding debt at year-end 2016 was £164.8 billion, representing a 2% decrease from £168.4 billion in 2016. Due to reduced volume of investment transactions there could be less opportunities for new lending during 2017, however, 80% of lenders indicated their intention to grow their lending book during the year ahead.
The quality of the lenders’ loan books has continued to improve with only 9% of loans being above 70% LTV, a reduction from 12.5% of loans, from the previous year. There has also been a material decline in distressed loans, which now stand at only £2.6bn (3% of the total loan book), down from £10.4bn (7%) at year-end 2015. This compares to £48bn at the end of 2009.
At the year-end 2016, average senior debt margins for prime office investment loans were reported to be 198bps, which is a decline of 25bps from the end of 2015, when it stood at 223bps. Interestingly this decline was not seen in loans to secondary office assets with margins remaining at the same level as last year at 263bps.
Finance for commercial development remains challenging without good quality pre-lets in place. Whilst 20 of the 77 lenders surveyed were willing to provide pre-let commercial development finance, only 8 lenders were prepared to consider funding speculative commercial developments.
Tim Crossley-Smith, National Head of Valuation Consultancy at GVA, commented:
“Marking the 10th anniversary of the peak of the last cycle, it is fascinating to compare the changing environment for property lending revealed in this year’s survey. Total outstanding debt has reduced by around 20% during this period, with LTVs for prime investments falling from 80% to 60%.
At a time when capital values in general remain some 20% below peak levels, lenders look comfortably placed, although historically low yields for prime property continue to put pressure on required ICRs.”
Andrew Thomson, Head of Debt and Equity broking at GVA, added:
“Investors and Developers are now benefiting from a large degree of competition in the UK real estate debt market which includes lending from UK banks and building societies, international banks, debt funds, peer to peer lenders, insurance companies, and family offices.
The low gilt and swap rates coupled with competitive margins make 2017 an excellent year to borrow new money or refinance existing debt facilities. For prime assets with an LTV of 60%, it is possible to obtain debt at fixed rates of 3% (2% margin plus 1% cost of funds), for a five year term. This is approximately half of the level witnessed ten years ago at the peak of the last cycle.”
De Montfort University’s Commercial Property Lending Report is the most comprehensive report into commercial property lending in the UK and has become a benchmark industry report for the sector. The reports are used by the Bank of England within its twice yearly Financial Stability Review and are regularly referred to in the Financial Times and property publications such as the Estates Gazette and Property Week.