New lending for real estate rose by 12% in 2018 to reach £49.6bn, according to the latest figures from Cass Business School’s UK Commercial Real Estate Lending report.
The rise in lending compares with a 13% decline in the volume of real estate transactions over the same period.
The disparity often marks a significant turning point in the market, said report author Dr Nicole Lux, senior research fellow and project director at the Faculty of Finance at Cass.
“Debt supply usually lags borrower demand by one year and 2017 was a strong year for property transactions,” she said.
“It remains to be seen if the debt market was just catching up in 2018. Historically, a relationship of 1:1 could easily lead to an overheating market and 2019 needs to be carefully monitored.”
She added: “This is also confirmed by an increasing share of new loan origination against outstanding loan books, which reached 29% of turnover in 2018, compared with a 10-year average of 20%.
“A relatively large amount of 26% of new loans was distributed via loan syndication, showing market debt and breadth are widening.”
Pricing in risk
The continuing struggles on the high street and the subsequent credit concerns over income have made retail property the most expensive asset class to finance.
The Cass report found that pricing of loans secured by prime retail property increased to 233bps from 214bps. Secondary retail increased from 285bps to 334bps.
According to the report, this provides lenders with a 3.2% yield to maturity on a five-year fixed-rate commercial real estate senior secured loan, compared with 0.9% on five-year gilts and 2.2% on UK BBB rated corporate bonds. Junior debt offered a yield to maturity of 9.2% in 2018, the report found.
“The market in 2018 remained robust, despite continued political and economic uncertainty, with increased capital looking to deploy into the debt space,” said CBRE’s head of debt and structured finance Paul Coates.
“This, in turn, has created greater competition among lenders, with borrowers seeing more favourable terms across many asset classes. However, how long this lasts remains to be seen.”
He added: “Where higher market and sectoral risks are evident, we are seeing lenders being more selective and setting wider pricing parameters, which can provide opportunities to achieve higher returns.
“This quality selection is key to robust underwriting, but whether we are seeing the correct level of risk-adjusted pricing in these sectors is yet unclear.”
Secured commercial real estate loans were found to be slightly more risky than other similar secured asset loans, with a total weighted average default rate of 3.2% and a write-down provision of 8% of the total value of a defaulted loan. This compares with a default rate of 1.3% of project finance loans, 0.7% for RMBS securitised loans and just 0.18% for BBB corporate loans.
Low-level PRS lending
While residential still took the lion’s share of the £8.8bn of development finance arranged last year, the £5.2bn supplied was down by £1bn on 2017. And despite the boom in PRS developments over the past year, lenders said that financing the sector remained difficult. Some £1.7bn was lent against PRS schemes, according to the report.
Ion Fletcher, director of finance and commercial policy at the British Property Federation, said: “It is surprising, despite the significant growth in the UK’s build-to-rent market over the past couple of years, that lending against build-to-rent development projects seems to remain muted.
“Clearly regulatory and commercial barriers remain that really need to be overcome to maximise the contribution of build-to-rent in addressing the UK’s housing shortfall.”
To send feedback, e-mail samantha.mcclary@egi.co.uk or tweet @samanthamcclary or @estatesgazette
