Post-crisis UK commercial property deleveraging slowed to a trickle in the first half of this year in part offset by a 25% year-on-year increase in the rate of new lending, which could bring to an end a run of six years of unbroken annual declines in total outstanding debt.
The bulk of the deleveraging since the onset of the crisis has been achieved through the workout of defaulted loans, refinancing assets at lower loan-to-values (LTVs) and the surge in equity-only commercial property investors in recent years.
These factors, coupled with rising values in commercial property values, has now virtually resolved the once-dubbed “insurmountable commercial property debt crisis”.
Total debt secured against UK commercial property fell by 0.9% in H1 2015 to £163.7bn, compared to a decline of 5.1% during H1 2014, which is the lowest point since 2005, as reported to the half-year edition of the De Montfort Commercial Property Lending Report published this morning.
This figure rises to an estimated £210.6bn once three additional tranches of UK commercial property debt unreported to the survey are counted: £18.5bn identified from the published financial statements of non-survey respondents; £26bn in outstanding UK CMBS debt; and £2.4bn of debt held by NAMA.
The mid-year 2015 outstanding total of £210.6bn reflects a 1% decline on the 2014 year-end total of £212.8bn and a decline of approximately 5% from £221.2bn recorded at mid-year 2014.
New lending in the first half of 2015 was £24.7bn, up 25% year-on-year in comparison with the £19.6bn recorded in the first half of 2014, and the highest half year value reported to the research since the onset of the financial crisis. De Montfort’s new lending figures comprise acquisition finance as well as refinancing lenders own and other lenders’ loans.
The H1 2015 new lending tally slightly exceed the £24.6bn recorded in the first half of 2008 but remains significantly less than the market’s peak in in H1 2007 when £49.2bn in new lending was reported.
The reported H1 2015 new lending volume is within a 10% range of the £22.5bn predicted by CoStar News six months ago, based on market knowledge and CoStar UK’s verified commercial property transaction data.
The combination of the virtual end of legacy loan deleveraging and the acceleration in new lending could see the overall volume of outstanding UK commercial property debt rise for the first time in seven years by the end of this year. De Montfort University’s 2015 annual survey will be published in May 2016.
Richard Yorke, director of market analytics at CoStar, said: “The big increase in new lending in H1 2015 corresponds with substantial investment activity. Our real time data reveals transaction volumes for the year to date to be around £64bn and still climbing.
“This means that the total for the year is likely to be close to 2014’s record £70bn. This implies that new lending will have been strong in H2, and 2015 will probably be the biggest year for new lending since 2007. It will be interesting to see if this momentum can be maintained in 2016.”
Over the six months to mid-year 2015, the total volume of commercial property investment loans under water – that is, at carrying LTVs above 100% – fell by £2.3bn to just £10.2bn, compared to £38bn at the end of 2011, the earliest point for which equivalent data was captured.
This H1 2015 figure reflects just 7.5% of the £135.5bn outstanding investment commercial property loans, underscoring the point that the banking system has in fact managed through the crisis.
This, of course, has not been without billions in government bailouts to rescue banks, for which profligate commercial property lending was a central failing, bad loan provisions and a long trail of bankrupted and bruised real estate investors. But insurmountable the crisis has not been.
The first half of the year also showed an encouraging pick-up in development finance, particularly for speculative or partly pre-let projects, where more non-traditional lenders now feel comfortable providing finance against such schemes.
At the same time, the research suggests that banking regulation may be having an adverse impact on development finance by the traditional lenders. At mid-year 2015, only 2.8% of debt was allocated to commercial development projects by these lenders.
Interest rate margins for senior debt continued their three-year long decline but the pace of decline has moderated considerably. At mid-year 2015, the average margin for senior loans secured by prime office property was recorded at 214bps, down from 218.7bps recorded at year-end 2014. The report suggests that that “the floor in interest-rate margins may have been reached”.
Following a surge in non-traditional lenders in 2014, banks and building societies remained the dominant lenders in the market, holding 76% of all loan originations at half-year 2015, compared to 75% at year-end 2014.
Peter Cosmetatos, CREFC Europe chief executive, said: “In his final mid-year report, Bill Maxted has seen the UK market safely exit the crisis. Almost all the news is good, and reflects my impressions of what’s been going on, into the second half of the year – stable volumes and stabilising margins at sustainable levels, most of the distressed debt sorted out, and an increasingly confident (but absolutely not over-exuberant) recovery in development finance.
“The only surprising note is the suggestion that the growth in market share of debt funds appears to be faltering, both in amount outstanding and in new origination. It remains to be seen whether that will correct in the second half of the year – a balanced, diverse market is in everyone’s interests.”
Ion Fletcher, director of policy (finance) at the British Property Federation, commented: “We seem to have reached a turning point in the amount of commercial property debt in the market, with the impact of post-crisis deleveraging almost totally cancelled out by new lending. While this suggests things are ‘hotting up’, a stabilising of senior debt margins and broadly level LTV ratios indicates lenders remain risk-conscious.
“We are also encouraged to see increased lending to speculative commercial property development projects. These are crucial if we want SMEs to have room to grow their businesses.”