The thaw in the frozen lending market is well under way.
For the first time since the onset of the global banking crisis, the most authoritative review of the debt market – The De Montfort University UK Commercial Property Lending Market report, published this week – reveals that new issuance has almost kept pace with deleveraging.
The banks are not just lending more, either. They are moving up the risk curve.
The total amount of debt secured against commercial property at the end of June was £193bn, according to the report, which surveys 81 key lenders covering the six months to June.
This figure rises to £212.1bn including social housing, and inflates to a total of £256bn when loans to commercial mortgage-backed securities – borrowers which did not participate in the research – that have been sold and held by Nama are factored in.
What is of most interest this year is that debt reduction has slowed to just 2.5% – a substantial drop on 4.3% at the same time last year, when the focus had been on the market’s move to shrink legacy debt. It also looks certain the annual reduction will fall short of previous years’ 9.9% drop.
Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council, Europe, sums up the two factors at play. He says: “The report gives an impression of a stabilising market with a decelerating pace of deleveraging while new lending entrenches itself.”
Firstly, £13.8bn was wiped off the total through means such as repayments, sales and write-offs in the past six months – down from £18.7bn at the same time last year.
Secondly, confirming a groundswell of sentiment that has been building during the year, there was an uptick in new lending. The value of loan originations in the first half of the year was £13.4bn – up from £11.3bn at the same time in 2012 – and the highest amount in a six-month period since the onset of the credit crunch.
When loan extensions are thrown in, gross lending rises to £18.1bn, up 17% from the first half of 2012.
Unexpected lenders
So who is behind all this business? The report, compiled by Bill Maxted and Trudi Porter, reveals that it is not all insurers or alternative lenders as might be expected.
Comparing the top 12 organisations that completed 72% of lending at the end of 2012 and at mid-year 2013 shows two key changes: more Germans and no insurers, down from three, six months earlier.
UK banks and building societies also hold firm in the top 12, but lose market share when looking at total loan originations.
Ion Fletcher, finance director at the British Property Federation, says that despite the rhetoric about alternative providers of finance, the proportion of CRE debt held by such players hasn’t really budged since the 2012 full-year report, hovering at £2.7bn out of the £193bn total.
“While we may well be moving towards a more diversified CRE lending market, it is happening very gradually and nobody should be under any illusions about the speed of change,” says Fletcher.
Cosmetatos is less keen to read anything into this finding. He chalks it up to a market in flux during a year that has seen organisations jostle for position in a new landscape.
Maxted echoes this sentiment. He said it was a very complicated market to define because there are so many moving parts.
“There is life in the market now – we have reached a turning point – but there are a lot of moving parts and it is quite difficult to see how it will unfold in regard to legacy, regulation and new lenders to name a few.”
One of the most dramatic changes of 2013 has been the move up the risk curve by lenders. The report captures this in a look at debt terms and project type, which show more development finance – even speculative development – higher LTVs, and falling margins, arrangement fees and income-to-interest cover ratios.
David Lebus, associate director at Jones Lang LaSalle, says: “The major indicators in this document are going the right way.”
Average margins for senior loans secured by prime offices fell across the board, as did many to secondary, and the research threw up some interesting results when splitting terms by lender.
It was German and North American lenders which slashed their margins the most dramatically – 44.5bp and 120.9bp respectively ?for prime offices and, interestingly, both by more than 100bp for secondary offices.
At the same time LTVs are rising – only marginally on average – but there are more loans being made at a higher LTV, including those to secondary property, is rising.
Lebus says: “We associate German lenders with being conservative but you can see they are clearly moving up the risk curve with secondary office margins dropping at the same time as LTVs rise.”
He compared this with UK lenders “who are setting out their stall at a more conservative level”, and losing market share in the process.
He added that the sharp drop in margins by North American lenders reflects that they have been in the market looking at riskier assets but are now coming back to the centre ground.
An increase in junior debt, mezzanine debt, and growing lending intentions further illustrate a market that is heating up. However, not everyone is benefitting – secondary retail and the regions are yet to.
And should this swift move from a frozen market to a highly competitive environment influencing underwriting cause concern? Cosmetatos says: “It is tempting to worry that we are going straight from trough to overheating and you have to watch that. But is risk being priced in a sensible way at the moment? I think generally, it is.”
bridget.o’connell@estatesgazette.com
Top 12 lenders by market share
Old and new debt
Oustanding debt
Loan to value ratio
