‘Strong but sober’ recovery in sight for real estate lending
Commercial real estate lending in the UK has recovered from its fall in the pandemic, but the thorny issue of under-performing loans remains.
The latest UK Commercial Real Estate Lending Report from Bayes Business School tracked £23.3bn of new loans during the first half of 2021, back to its level at the same point in 2019 and up by 50% on the same period a year ago.
That uptick suggests that a backlog of transactions from the depths of the Covid-19 crisis is now being worked through, said Dr Nicole Lux, senior research fellow at Bayes Business School and author of the report.
Commercial real estate lending in the UK has recovered from its fall in the pandemic, but the thorny issue of under-performing loans remains.
The latest UK Commercial Real Estate Lending Report from Bayes Business School tracked £23.3bn of new loans during the first half of 2021, back to its level at the same point in 2019 and up by 50% on the same period a year ago.
That uptick suggests that a backlog of transactions from the depths of the Covid-19 crisis is now being worked through, said Dr Nicole Lux, senior research fellow at Bayes Business School and author of the report.
“It is interesting to see the market bouncing back so quickly at the start of 2021, despite lenders still addressing loan defaults and covenant breaches as well as changes to the new Sonia rate,” Lux said. “After a couple of difficult years for the lending market, new lending has been resilient, and I would expect and hope that remains the case as global economies open up once more.”
UK banks took the lead in terms of market share, with debt funds accounting for the next most significant chunk of activity. Insurance companies lent double the amount of a year ago, while German banks have staged a notable retrenchment in the UK.
CREFC Europe chief executive Peter Cosmetatos, describing the market recovery as “strong but sober”, said: “Debt funds seem to be stepping up their market importance, accounting for almost a quarter of new origination and shifting from mezzanine lending to whole loans, often enabled by back funding from the banking sector.
“Also striking are the emerging sector preferences of different lender types, with UK banks favouring lending to residential over the prime offices still preferred by German banks and the higher yielding office financing provided by debt funds.”
Under-performing loans remain at 9.3% of outstanding loan books. Lux said that banks have scaled back their outstanding loan books to real estate debt, while bond issuance and CMBS sales have picked up.
Margins for prime office loans rose by 12 basis points, with a 22bps rise for prime industrial. In the residential development market – which accounted for 12% of origination – margins rose by 15bps. The average loan-to-value ratio is now below 56%.
Ian Malden, executive director at Savills, said: “While margins have increased reflecting greater perceived risk, borrowers have never had a greater choice to secure competitively-priced finance from a record number of lenders, both in and beyond those captured in the survey – albeit at more conservative LTVs.”
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