Lit construction site at dusk

26

December

2016

Confidence Returns to UK Commercial Real Estate Sector

Report Shows UK Commercial Real Estate Sector Is On A High

Confidence has returned to the commercial property lending market in the UK as new loan deals hit a post crisis high, according to a report from De Montfort University.

The University’s report, which is the most comprehensive study of the UK’s commercial property lending market shows that outstanding loan books increased for the first time since 2008. The total amount of outstanding debt stood at £168.4bn at the end of 2015, representing a 1.9% increase on £165.2bn at year-end 2014.

The report says that further evidence that the market has recovered can be seen in the decline of almost 50% in the value of distressed loans, that is those in default and in breach of financial covenant. At the year-end in 2015, the value of distressed loans reported to the research was £12.1 billion, compared to £23.2 billion a year earlier and £47.6 billion at the end of 2009.

Loan to value (LTV) ratios on existing loans continue to fall, reflecting the rise in commercial property values and banks continuing to lend on similar terms to recent years. At the year-end in 2015, some 87.5% or £123.5 billion of outstanding debt had a LTV ratio of 70% or less, compared to 77% or £107 billion at the year-end in 2014 and 63% or £99 billion at year end in 2013.

Although they still dominate the market, UK banks and building societies saw their market share continue to decline. They represented 34% of new loans at year end in 2015, the lowest level ever recorded by the research, compared to 39% the previous year. The proportion of outstanding debt held on their books also fell, from 49% of the total at year end in 2014 to 45.5% in 2015.

For the first time, insurance companies were the second largest category of new loan originators, representing 16% or £8.57 billion of the total in 2015. The exposures of insurance companies now account for 15.1% or £25.4 billion of the market, compared to 12.7% or £21 billion in 2014.

View of Thames River,
View of Thames River, Central London

Regional distribution of outstanding loans showed a strong bias in favour of central London; 43% of the total outstanding debt is secured against real estate in the capital city, the highest result ever recorded by the research, and a dramatic increase from the 26% recorded in 2010. This indicates a strong appetite by lenders, particularly those from overseas, for exposure to the UK’s biggest city.

The 2015 report demonstrated lenders’ continued preference for big ticket lending to both development and investment projects. Only 14% of banks, building societies and insurance companies were prepared to write a loan of £5 million or less for commercial investment projects, compared to 67% who would do so at above £100 million.

According to Peter Cosmetatos, chief executive of the lenders’ trade association CREFC Europe, the report confirms that in terms of fundamentals, sentiment and discipline, the market was in a good place coming into 2016 and the uncertainty provoked by the forthcoming referendum on the future of the UK in the European Union.

‘At a more structural level, the transformation of the loan distribution market is striking. North American banks that would traditionally have favoured securitisation are establishing themselves as a syndication powerhouse, almost certainly influenced by a combination of commercial and regulatory factors. This lender category was the only one to report syndicating more in 2015 than in 2014, accounting for well over half of the total value of loans syndicated,’ he said.