New commercial property lending in the UK reached a six-year high topping £45bn for the 2014 calendar year, with insurance companies and debt funds accounting for a quarter of all new loans and almost one-fifth of the asset classes entire £165.2bn outstanding debt.
According to this morning’s 17th annual De Montfort Commercial Property Lending Report, new lending accelerated in the second half of last year by 30.6% to £25.6bn, while the year-on-year growth in new originations soared 50.2% to £45.2bn, excluding £0.67bn of lending secured by social housing.
The six-year high in new lending to £45.2bn is in line with CoStar News’ forecast six months ago upon the publication of the half year figures.
Writing in mid-December, CoStar News stated: “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… when around £45bn in new loans and restructured loans were recorded.”
The total value of outstanding debt declined from £180bn at year-end 2013 to £165.2bn at year-end 2014, excluding loans of approximately £16.1bn secured by social housing.
Overlaying the UK annual commercial property lending volumes, as recorded by De Montfort Commercial Property Lending Report, with CoStar’s 2014 UK Investment Review, which is the most authoritative account of UK commercial real estate transaction volumes reveals an interesting blended leverage picture.
CoStar recorded £70.7bn in UK transaction volumes in 2014, which against the headline £45.2bn in new loans and refinancings implies a blended leverage last year of 63.9%.
The blended leverage can also be broken down into each half of last year. In the first half of 2014, CoStar recorded £30.57bn of investment transactions while De Montfort captured £19.6bn of new loans and refinancings – implying a 64.1% blended leverage.
Over the second half of last year, transaction volumes picked up to £40.15bn, as proportionally did the new loans refinanicngs captured by De Montfort, at £25.6bn – taking the H2 blended leverage to 63.7%.
Of course, these blended leverage numbers are indicative only as they do not exclude 2014’s cash-only purchases but nevertheless illuminate the anticipated correlation between the lending market and transactional markets upswing over the course of last year.
Flirting with the crystal ball once again, CoStar has already verified the first quarter of 2015’s UK transaction levels at £16.8bn. Based on unverified anecdotal evidence of the second quarter and the visible pipeline over the final five weeks of the second quarter of 2015, transaction volumes for the first half of 2015 could feasibly reach up to £35bn.
Assuming 2014’s lending appetite continues unabated into the first half of this year, at a blended leverage of 64% (excluding the impact of cash-only transactions), De Montfort’s tally of UK commercial property lending for H1 2015 could be around the £22.5bn range.
It is clear that the UK commercial property lending has recovered after several very difficult years in which there was considerable noise surrounding the allegedly “insurmountable debt mountain” overhanging the sector.
The De Montfort data now shows that the bank-dominated lending market of the past effectively worked through the crisis through piecemeal write-downs, provisions, loan enforcements as well as individual and loan portfolio sales.
In recent times, as the underlying property market has recovered, de-leveraging banks have in certain cases been able to secure near to par for loan sales. One case in point is the anticipated recoveries for Aviva in its latest – and likely final – legacy loan portfolio sale, the as-yet-unnamed £2.5bn UK loan portfolio sale which CoStar News reported on this week.
In respect of bank’s legacy commercial property investment ‘problem’ loans, defined with carrying LTVs above 100%, have in the last three consecutive full calendar years – 2012 through to 2014 – have dramatically shrunk.
For this segment of De Montfort’s data only investment property debt has been recorded. Over the three year period, the outstanding debt has shrunk 21% from £176bn to £139bn.
The problem loans above 100% LTV has fallen from 23% of £176bn in 2012, equating to £40.5bn, to 9% of £139bn at the end of 2014, equating to £12.51bn. Of course, the recovery risk to banks is much lower than the total £12.5bn, with lenders able to recoup the bulk of this total through asset or loan sales.
This is not to overshadow the very painful period the banking sector has endured in respect of its commercial property lending past, but that the system has – with the aid of taxpayer bailouts, write-downs, and in some cases eye-watering annual losses – worked through crisis period to a near normalised state now.
The risks on the horizon which could affect the now fairly benign environment is expected interest rate spikes in the UK, Europe and the US, which would increase loan interest payments to borrowers and potentially asset revaluations which would increase the LTV composition of the UK commercial property sector. This, in turn, could trigger certain loans into covenant breaches.
Over the last six years in particular, the diversification of the UK commercial property lending market has steadily deepened. Insurance companies now represent 12.7% of total debt, up from 10.2% last year. Other non-bank lenders, principally debt funds, represent 6.5% – almost doubling their 2013 share of 3.7%.
These lenders have only been accounted for since 2011, when – according to the report: “secured lending to commercial property [became] more attractive to these organisations due to regulatory changes and business opportunities created by the withdrawal of banks from this sector”.
Melanie Leech, chief executive of the British Property Federation, said: “The increasing diversification of lenders has been marked over the past year, and we feel this is broadly positive for the market. Not only will a larger presence of non-bank lenders provide our sector with alternative sources of finance – lenders with different investment horizons and business strategies; a more diverse finance market can also contribute to financial stability by spreading exposure to UK real estate among a greater range of investors.”
Greater market diversification is further evidenced by the share of outstanding debt held by the top 12 lenders, which stood at 66% of outstanding debt in 2014 compared to 72% in 2013.
Also noteworthy is the dramatic decline in market share by UK banks and building socities – falling by 45%, or 33 percentage points, to 39% at the end of 2014.
Lending intentions remained strong, with 82% lenders intending to increase their loan book size and 84% intending to increase loan originations.
The report showed that the market for commercial development finance remains relatively challenging. Only 17 organisations are reported to be willing to lend even against fully pre-let development, but the number falls to seven organisations for 50% pre-let, 50% speculative development schemes, and just five organisations for speculative commercial development.
Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council (CREFC) Europe, said: “It’s good to see the UK CRE finance market normalising after some very tough years. While some may worry that the market is becoming so competitive that it may be overheating, the report in fact shows a more complex picture with plenty of opportunities for the right lenders.
“There are continuing challenges both for development finance and for small ticket lending, two areas where few lenders seem active, but which are critically important for the economy, especially in the regions.”