UK real estate lending hits record high

Any fears that the UK’s commercial real estate lending market would face a drawn out recovery from the downturn of the Covid-19 pandemic have been assuaged. Lending has bounced back and then beyond its pre-pandemic high, hitting a fresh record of almost £50bn in 2021. The latest UK Commercial Real Estate Lending report from Bayes Business School tracked £49.8bn of new lending over the course of the year, based on data from 76 lenders. That marks a 48% rise on 2020. Report author Nicole Lux, senior research fellow at the business school, said the first half of the year had seen a “backlog” of deals unstuck, while activity in the latter half was driven by new acquisition financing. Underperforming and default loans dropped from 4.6% of all lending a year ago to 2.3%. “It is very encouraging to see how quickly lenders have dealt with problem loans, showing efficient workout and borrower communication,” Lux said. “The next hurdle for 2022 will be the increasing interest rates and declining income coverage ratios, which are expected to decline to 1.4x–1.6x on a number of loans.” Pricing narrowed for most asset classes during the year, with a notable exception for prime offices, where margins rose by 25 basis points, and prime industrial, where they rose 23 bps. British banks provided 39% of new loans during the year, followed by international (excluding German) banks at 22%. Smaller lenders were most focused on residential development finance. Some 56% of lenders said they were willing to look at prime retail loans this year, compared with just 8% willing to consider retail development. Prime industrial and residential investments were also in favour. Lenders also highlighted the attraction of alternative sectors, including data centres and life sciences. Peter Cosmetatos, chief executive of CREFC Europe, said that the market “has navigated the challenges of recent years remarkably well” but warned there will be questions over whether it will show the same resilience in the face of “geopolitical turmoil and inflation” as it did with Brexit and Covid. Neil Odom-Haslett, president of the Association of Property Lenders, said: “It is easy to forget that a little over two years ago we were in the first lockdown and many commentators and economists were predicting a very gloomy picture for real estate. We can all agree there were bumps along the way and there will continue to be, but to see a strong rise in origination without compromising underwriting standards is really positive.” On ESG policies, some 46% of lenders said they had minimum EPC requirements for assets they lent against, up from 38% in 2020’s half-year survey, and more than half said they would lend more cheaply against assets with better sustainability credentials. Odom-Haslett  added: “It is pleasing that ESG has risen up the agenda with most lenders and borrowers now taking it seriously. We all have a responsibility to address these challenges and collectively we can make a real difference in ensuring our sector takes a leading role.”   To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Image © Pixabay