De Montfort Survey: Alternative lenders coming of age as new lending rises to six-year high

The level of new commercial property lending in the UK accelerated to £19.6bn over the first half of the year, the highest six-month new origination volumes since 2008, with insurers and debt funds accounting for almost a quarter of all new loans.

In the first half of this year, new origination raced to two-thirds of 2013’s annual lending tally, at £29.9bn, according to the half-year De Montfort Commercial Property Lending Report published this morning. 

Given the scale of new financings in the subsequent five-and-a-half months and expectations for the remaining weeks of the year, it is a virtual certainty that when the end of 2014 annual survey is collated and published next May, that annual new lending volumes will reach a six-year high.

Furthermore, new lending for 2014 could feasibly reach 2009’s aggregate annual lending levels, including around £30bn in refinancings, when around £45bn in new loans and restructured loans were recorded.

To put this in an appropriate context, however, even if a gross annual lending figure of between £40bn and £45bn is achieved for the full 2014 calendar year, this remains orders of magnitude lower than the profligate lending levels seen at the height of the last property boom when lending reached £49.2bn in the first half of 2007 alone.

Bill Maxted and Trudi Porter, co-authors of the De Montfort survey, noted that the increase in activity generally in the commercial property market was not “debt fuelled to the same extent as occurred before the financial crisis… [it is] initially, therefore, most probably equity-driven”.

Loan extensions over the first half of the year increases the gross lending for the period by £2.8bn to £22.4bn, estimates the De Montfort survey. This compares with £18.1bn and £15.4bn recorded for the first of 2013 and 2012, respectively.

The rise of non-bank lenders has been a notable feature of the recovery years in UK property markets, with De Montfort capturing lending data since its 2012 year-end survey.  In this year, insurance lenders were revealed to have made the quicker inroads into gaining market share in UK property lending, accounting for 10% of the year’s recorded levels, while debt funds came in at 5%.

By the end of last year, debt funds’ new lending market share had caught up with insurance lenders, edging to a one percentage point superior proportion of recorded new lending market share – a marginal lead which has been retained in this morning’s half year survey, at £2.3bn and £2.2bn, respectively

The structural diversification of the market share for new UK property lending is now clear.  Indeed, the proportionate market share for UK banks and building societies has halved since 2008 to 36%, while insurers and debt funds together account for 23% of new lending in the first six months of the year.

At the full market level, however, alternative lenders are dwarfed by the scale of banks’ legacy lending.  

The aggregated value of outstanding debt recorded in loan books and secured only by UK commercial property, declined from £180.6bn at year-end 2013 to £171.0bn at mid-year 201, reflecting a 5.1% decline.  For clarity, these figures do not count undrawn facilities and exclude social housing lending.

Of this £171bn total, £164bn is held by banks – including £91.8bn by UK banks and building societies – and £7bn held by insurance companies and debt funds.

De Montfort separately attempts to measure the size of the broader UK property lending market, including known non-participating lenders to the survey, the outstanding volume of UK CMBS loans as well as NAMA’s remaining UK loans.

On this basis, the estimated size of the entire UK property debt market was £221.2bn at the end of June, which reflects a 6.8% decline on the equivalent figure at the end of 2013, which was £237.5bn.

The half-year results found that at mid-year 2014, two-thirds (66.5%) of outstanding debt had a loan-to-value ratio of 70% or less, compared with 63% at year-end 2013. Outstanding debt with a loan-to-value ratio of between 71% and 100% fell to 16%, compared with 18% at year-end 2013.

This year’s half year survey also highlighted the continued decline in loan interest rate margins, which began mid-year 2012 and continued during the first six months of 2014.  

The average margin for loans secured by prime offices was recorded at 226.5bps – a decline of 26.4bps from year-end 2013.  For loans secured by secondary offices, average interest rate margins declined by 28.8bps to 275.7bps.

However, the report found that the polarised commercial real estate finance market of the last few years has not yet disappeared: significant differences in lending activity and appetite remain across the country. For example, 80% of organisations active in the market reported that they would lend on prime investment projects in London, compared to fewer than half (46%) who would do so in Northern Ireland. 

While lenders’ appetite for development risk is also improving, it remains a preserve for the specialist, particularly where the project is speculative: 26% of lenders were prepared to provide senior debt to finance such projects at the mid-point of 2014, compared to 12% at mid-year 2013.

Liz Peace, chief executive of the British Property Federation, commented: “Although new lending is growing at a significant rate, the fact that the market seems to be mainly equity driven means that we are unlikely to be living through another 2007.

“However, we are concerned about the potential implications of the lack of debt finance available for speculative development. While lender caution in this area is totally understandable given events in the past few years, there are parts of the country where new, high-quality business space is urgently needed, particularly for SMEs. Speculative projects are often the only ones that cater to this type of enterprise.”

Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council (CREFC) Europe, added: “The recovery in commercial real estate debt markets, so long delayed, has been dramatic now it’s finally here.

“It’s good to see the focus of the De Montfort report increasingly shift from legacy problems to a diverse and growing lending market. It is to be hoped that ongoing regulatory developments support a period of healthy growth rather than undermining or distorting it.”

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
Gallery | This entry was posted in Banks, CMBS, Insurance companies, Lenders, Market Trends, Mezzanine, Refinancings and tagged . Bookmark the permalink.

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