Property Lending enters a new downward cycle, with further distress expected in 2021
UK Commercial Real Estate Mid-Year Report reveals sharp market slowdown and higher lending costs for the second consecutive period
The Business School (formerly Cass) UK Commercial Real Estate Report: Mid-Year 2020, authored by Dr Nicole Lux, Senior Research Fellow at the Business School (formerly Cass), shows a steep decline in lending for the first half of 2020, with a year-on-year decline of 34 per cent of new loan origination from the same period in 2019 as the coronavirus pandemic took its early toll.
Findings from the report, covering data up to June 2020 reveal:
- New loan origination in second consecutive period of decline of £15.5 billion, a 34 per cent year-on-year downturn from the first half of 2019
- Margins across all property types rose by 20–50 basis points
- New loan to values (LTVs) reached a new historic low with an average of between 50 and 55 per cent
- Larger lenders are getting larger, while the smaller lenders continue to struggle
The first half of 2020 showed considerable dislocation of lending markets. While the lockdown has slowed down lending activity in general, the real dislocation becomes visible in the type of loans that are being agreed. With a lack of large investment transactions, only 14 lenders have written loans larger than £100 million.
While some lenders are actively looking for new opportunities, others are only considering business from their existing borrower base. A total of 22 per cent of lenders have not done any lending in the first half of 2020.
Most lenders are no longer lending to retail assets – particularly to shopping centres. However, outstanding loan amounts allocated to retail assets have remained the same, as lenders choose to extend existing loans that could not be repaid or refinanced elsewhere. Overall, seven surveyed lenders were still willing to consider secondary retail assets when looking at new financing requests.
Due to the growing perception that residential - especially the private rented sector – has strong defensive characteristics, investments attracted the most financing in 2020 at 29 per cent. This was a trend observed amongst all groups of lenders, with the second most popular asset class being offices with a share of 24 per cent of new loans.
Dr Lux said:
“Over the next two years we estimate that £9.5 billion of retail assets and a further £13.5 billion of alternative assets like student housing, hotels and care homes need to be refinanced. Many facilities are will be at 85 to 120 per cent LTV at that time.
“The short-term effects of the coronavirus pandemic have only just become visible, but the long-term effects will impact lending and banking into next year and beyond.
“With significantly lower leverage levels and better bank capitalisation compared to the global financial crisis, distressed loan sales and receiverships are still a long way off. However, the real estate debt cycle has entered a new phase.
“Despite the regulatory curb on loan books, they have been expanding steadily and are 13 per cent higher in 2020 than in 2017. Loan origination displayed the third lowest six-month period since 2010, and the development cycle has reached a new peak with £23bn. At this point, it is unclear if 2020 was the trough, or 2021 will see further decline in origination and increasing LTVs.”
Purchase a full copy of the Business School (formerly Cass) UK Commercial Real Estate Report: Mid-Year 2020.
Find out more about the Real Estate Research Centre.
