Cass academic expects ‘full year of slowdown’ in loan market

Commercial real estate loan origination saw a double-digit fall last year, according to the latest instalment of a widely regarded report on the market – and its author has warned the coronavirus crisis could now lead to a year-long downturn. The latest Cass Business School UK Commercial Real Estate Lending Report showed a 12% drop in new loan origination during 2019, at £43.8bn. That was in line with property investment, which stood at £48bn. Less than half of new loans (46%) financed property acquisitions, with the remainder refinancing. There are £43bn of loans due to be refinanced in 2020 and 2021. Loan margins for prime London offices rose from 199 basis points to 205 basis points over the year. The only sectors in which loan pricing fell were hotels and residential investment. Nicole Lux, senior research fellow at Cass Business School and author of the report, expects costs to rise further this year, and for defaults to increase as the impact of the coronavirus pandemic continues to be felt. “In January, when I started speaking to everyone [for the report], the climate was very different,” Lux said. “People were hoping for 2020 to be better than 2019 and we all agree now the market has changed dramatically and is probably going to be worse than 2019. “The crisis, the downturn in the market, will be much longer than currently anticipated. I don’t think we’ll get away with three or four months, or six months. It will be a full year of slowdown.” Lux singled out loans secured on retail properties as those likely to be affected by defaults, with write-offs and debt losses of between £8bn and £10bn on the horizon. She added that development loans will add to banks’ costs, and said there are roughly £22bn of such loans affected by construction delays and defaults of construction contracts. “Development loans is another area that worries me,” Lux said. “We were left with £25bn of undrawn facilities in development finance by year end, which already made me think there been some hold up and delay in development because of the political uncertainty… [Now] there will be more delays… By the end of 2019 many developers were not willing to reprice residential units yet in order to sell. But they will come under pressure as banks become less patient in trying to get some of this money back.” To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette