Lending activity has bounced back to pre-pandemic levels, according to findings from the latest UK Commercial Real Estate Lending report, authored by Dr Nicole Lux, Senior Research Fellow at Bayes Business School (formerly Cass).
The report, using data collected from 76 major UK lenders, indicates a peak of new loan origination volume with 2021 yielding the strongest overall year in the market since 2015.
New lending volume in 2021 reached £49.8 billion – more than in 2019 and 48 per cent higher, year-on-year, than 2020. During the first half of 2021, the backlog of transactions stuck in the pipeline from 2020 was being resolved while the second half focused on more new acquisition financing for existing and new customers.
Key highlights from the report, which covers data up to December 2021, also show:
- Development lending made up 20 per cent of new origination in 2021, but the residential development pipeline has slowed down.
- Underperforming and defaulted loans reduced from 4.6 per cent to 2.3 per cent during 2021, representing a significant decline.
- Margins for prime office loans rose by another 25 basis points (bps) over 12 months, but pricing has narrowed for other asset classes, such as prime retail, for which pricing was already very high.
Overall debt issuance was strong across all markets. In the UK, Commercial Real Estate (CRE) bond issuance went from £6 billion to £10 billion between 2020 and 2021 according to the Bayes Bond Monitor. The CRE bond market, including commercial mortgage-backed securities (CMBS) represents between five and eight per cent of total secured CRE market debt.
While the first half of 2021 showed a rapid recovery of market activity, borrowers were looking to finalise, restructure and refinance loans that had been on hold during 2020. For the whole year, this accounted for 52 per cent of lending while the other 48 per cent was new acquisition financing.
British banks have been dominating their own market, providing 39 per cent of new financing, followed by international banks (excluding German banks) which held a share of 22 per cent. Overall the largest 12 originators were responsible for 57 per cent of new loans, of which six were UK Banks.
Development funding pipeline declined from 2020 to 2021, accounting for just 20 per cent of total origination. This was mostly due to lower residential funding.
Smaller lenders concentrated 15 per cent of their lending in residential development finance, as a lender group ‘Other Lenders (debt funds)’ supplied 32 per cent of new residential development loans, and UK Banks supplied 47 per cent. For the first time since the start of the pandemic, there was a noticeable amount of speculative office schemes being funded mainly in Central London.
Prime office margins have edged up to 2.54 per cent (this was 2.29 per cent at year-end 2020) due to the changing universe of lenders offering loans. On a 60 per cent loan-to-value (LTV) basis, margins increased from 2.18 per cent in 2020 to 2.42 per cent in 2021. Loan pricing on prime industrial assets have also increased by 23bps. However, for other property sectors such as prime retail, and secondary properties, which priced very wide from prime, the pricing gap has narrowed by between 15 and 25bps.
A large pricing gap also remains between the largest balance sheet lenders and smaller lenders, resulting in a price differential of 1.17 per cent bps for prime office. For example, prime office loan margins for the largest lender stand at an average of 1.88 per cent while borrowers can expect to pay an average loan margin of 3.05 per cent with borrowings from smaller lenders. With recent interest rate increases of the 5-year Sonia swap to 1.86 per cent, this leads to an overall interest rate of 4.4 per cent for some properties close to prime office yields – leaving little income coverage with interest coverage ratios (ICRs) expected to range from 1.4x–1.8x. This compares to the weighted average coupon for Sterling bonds issued by property companies specialising in offices between three and five per cent for companies rated “A” or better.
When asked generally about lending appetite for 2022, 56 per cent of lenders said they were willing to look at prime retail loans, compared to 8 per cent who were willing to look at retail development. Prime industrial and residential investments are also two sectors that most lenders are willing to finance (92 per cent and 80 per cent respectively).
For the first time, the survey asked about alternative sectors of lending. 31 lenders expressed an interest in financing assets in life sciences, with 23 favourable towards finance data centres, requiring specific teams and knowledge. Just 23 lenders stated they lend in this of senior living.
Dr Nicole Lux, Senior Research Fellow at Bayes Business School and author of the report author, said:
“It is very encouraging to see how quickly lenders have dealt with problem loans, showing efficient workout and borrower communication. The next hurdle for 2022 will be the increasing interest rates and declining income coverage ratios, which are expected to decline to 1.4x–1.6x on a number of loans.”
Peter Cosmetatos, Chief Executive of CREFC Europe, said:
“So often an amplifier of stress in the past, the real estate finance market has navigated the challenges of recent years remarkably well. Origination levels are back in their 2014 to 2019 range after a modest dip in 2020, and defaults remain low – a resilience that is the result of both the discipline and the diversity of lenders. Insurers and other non-bank lenders have increased their combined share of the market from a quarter to a third, ensuring that credit is available even where banks are less active.
“Two questions for the future are will the market be as resilient to the consequences of geopolitical turmoil and inflation as they were to Brexit and Covid? And who is best placed to finance the repurposing and decarbonisation that so much of the nation’s real estate needs?”
Paul Coates, Head of Debt and Structured Finance, CBRE Capital Advisors Ltd
“It is positive to see the resilience and diversity in the UK lending market, supporting transactions across the market. A key emerging trend which we see accelerating is all aspects of Environmental, Social and Governance (ESG) in lending discussions. This will quickly become at the forefront of minds, not only on the key standards and metrics for new buildings but how we as a lending industry respond to the risks and opportunities in assets which might otherwise become stranded.”
Nick Harris, Head of UK and Cross Border Valuation, Savills:
“The increase of loan origination increasing by almost 50 per cent on the previous year suggests a rapid return to pre-pandemic levels of activity, and in fact surpasses 2017 to 2019 volumes. Importantly, most lenders are maintaining their risk profile through moderate LTVs.
“Furthermore, the survey indicates a continuation of the growth of non-bank lenders and choice for borrowers in the marketplace.”
Neil Odom-Haslett, President, Association of Property Lenders, said:
“It is easy to forget that a little over two years ago we were in the first lockdown and many commentators and economists were predicting a very gloomy picture for real estate.
“The report in 2020 perhaps gave us a pleasant surprise in how resilient the lending market was, as we were expecting write downs across the lending community as the impact of Covid and lockdowns took effect.
“The 2021 report really shows how well prepared the lenders were to weather the Covid storm. We can all agree there were bumps along the way and there will continue to be, but to see a strong rise in origination without compromising underwriting standards is really positive.
“It is pleasing that ESG has risen up the agenda with most lenders and borrowers now taking it seriously. We all have a responsibility to address these challenges and collectively we can make a real difference in ensuring our sector takes a leading role.
“The report also shows that the alternative lenders are certainly here to stay, giving borrowers more financing options than ever.”
Adrian Rowland, Director in the Colliers Debt Advisory team, said:
"The Bayes report supports our experience of a renewed appetite for lending across the UK CRE market in 2021, with debt being made available to existing and new borrowers alike – albeit often at lower average LTVs than seen pre-pandemic.
"In 2020 we witnessed a perfect storm created by the effects of Brexit and then Covid which led to the reluctance of many lenders to put new money into the market. This is now hopefully well behind us and borrowers across all sectors once again have a real choice from an increased number of debt providers offering truly competitive terms."
Euan Gatfield, Head of EMEA CMBS and Loan Ratings, Fitch Ratings:
“The last time the interest rate cycle turned sharply upwards was in 2005, which resulted in lending standards weakening as higher-yielding collateral was sourced to maintain interest coverage. The ensuing loan vintages suffered high losses in the GFC. This time round while interest rates are rising from a much lower base, property yields are also generally lower, so as we keep our eye on credit it will be fascinating to track how lenders adapt underwriting to maintain coverage ratios.”
ENDS
Lending activity has bounced back to pre-pandemic levels, according to findings from the latest UK Commercial Real Estate Lending report, authored by Dr Nicole Lux, Senior Research Fellow at Bayes Business School (formerly Cass).
The report, using data collected from 76 major UK lenders, indicates a peak of new loan origination volume with 2021 yielding the strongest overall year in the market since 2015.
New lending volume in 2021 reached £49.8 billion – more than in 2019 and 48 per cent higher, year-on-year, than 2020. During the first half of 2021, the backlog of transactions stuck in the pipeline from 2020 was being resolved while the second half focused on more new acquisition financing for existing and new customers.
Key highlights from the report, which covers data up to December 2021, also show:
- Development lending made up 20 per cent of new origination in 2021, but the residential development pipeline has slowed down.
- Underperforming and defaulted loans reduced from 4.6 per cent to 2.3 per cent during 2021, representing a significant decline.
- Margins for prime office loans rose by another 25 basis points (bps) over 12 months, but pricing has narrowed for other asset classes, such as prime retail, for which pricing was already very high.
Overall debt issuance was strong across all markets. In the UK, Commercial Real Estate (CRE) bond issuance went from £6 billion to £10 billion between 2020 and 2021 according to the Bayes Bond Monitor. The CRE bond market, including commercial mortgage-backed securities (CMBS) represents between five and eight per cent of total secured CRE market debt.
While the first half of 2021 showed a rapid recovery of market activity, borrowers were looking to finalise, restructure and refinance loans that had been on hold during 2020. For the whole year, this accounted for 52 per cent of lending while the other 48 per cent was new acquisition financing.
British banks have been dominating their own market, providing 39 per cent of new financing, followed by international banks (excluding German banks) which held a share of 22 per cent. Overall the largest 12 originators were responsible for 57 per cent of new loans, of which six were UK Banks.
Development funding pipeline declined from 2020 to 2021, accounting for just 20 per cent of total origination. This was mostly due to lower residential funding.
Smaller lenders concentrated 15 per cent of their lending in residential development finance, as a lender group ‘Other Lenders (debt funds)’ supplied 32 per cent of new residential development loans, and UK Banks supplied 47 per cent. For the first time since the start of the pandemic, there was a noticeable amount of speculative office schemes being funded mainly in Central London.
Prime office margins have edged up to 2.54 per cent (this was 2.29 per cent at year-end 2020) due to the changing universe of lenders offering loans. On a 60 per cent loan-to-value (LTV) basis, margins increased from 2.18 per cent in 2020 to 2.42 per cent in 2021. Loan pricing on prime industrial assets have also increased by 23bps. However, for other property sectors such as prime retail, and secondary properties, which priced very wide from prime, the pricing gap has narrowed by between 15 and 25bps.
A large pricing gap also remains between the largest balance sheet lenders and smaller lenders, resulting in a price differential of 1.17 per cent bps for prime office. For example, prime office loan margins for the largest lender stand at an average of 1.88 per cent while borrowers can expect to pay an average loan margin of 3.05 per cent with borrowings from smaller lenders. With recent interest rate increases of the 5-year Sonia swap to 1.86 per cent, this leads to an overall interest rate of 4.4 per cent for some properties close to prime office yields – leaving little income coverage with interest coverage ratios (ICRs) expected to range from 1.4x–1.8x. This compares to the weighted average coupon for Sterling bonds issued by property companies specialising in offices between three and five per cent for companies rated “A” or better.
When asked generally about lending appetite for 2022, 56 per cent of lenders said they were willing to look at prime retail loans, compared to 8 per cent who were willing to look at retail development. Prime industrial and residential investments are also two sectors that most lenders are willing to finance (92 per cent and 80 per cent respectively).
For the first time, the survey asked about alternative sectors of lending. 31 lenders expressed an interest in financing assets in life sciences, with 23 favourable towards finance data centres, requiring specific teams and knowledge. Just 23 lenders stated they lend in this of senior living.
Dr Nicole Lux, Senior Research Fellow at Bayes Business School and author of the report author, said:
“It is very encouraging to see how quickly lenders have dealt with problem loans, showing efficient workout and borrower communication. The next hurdle for 2022 will be the increasing interest rates and declining income coverage ratios, which are expected to decline to 1.4x–1.6x on a number of loans.”
Peter Cosmetatos, Chief Executive of CREFC Europe, said:
“So often an amplifier of stress in the past, the real estate finance market has navigated the challenges of recent years remarkably well. Origination levels are back in their 2014 to 2019 range after a modest dip in 2020, and defaults remain low – a resilience that is the result of both the discipline and the diversity of lenders. Insurers and other non-bank lenders have increased their combined share of the market from a quarter to a third, ensuring that credit is available even where banks are less active.
“Two questions for the future are will the market be as resilient to the consequences of geopolitical turmoil and inflation as they were to Brexit and Covid? And who is best placed to finance the repurposing and decarbonisation that so much of the nation’s real estate needs?”
Paul Coates, Head of Debt and Structured Finance, CBRE Capital Advisors Ltd
“It is positive to see the resilience and diversity in the UK lending market, supporting transactions across the market. A key emerging trend which we see accelerating is all aspects of Environmental, Social and Governance (ESG) in lending discussions. This will quickly become at the forefront of minds, not only on the key standards and metrics for new buildings but how we as a lending industry respond to the risks and opportunities in assets which might otherwise become stranded.”
Nick Harris, Head of UK and Cross Border Valuation, Savills:
“The increase of loan origination increasing by almost 50 per cent on the previous year suggests a rapid return to pre-pandemic levels of activity, and in fact surpasses 2017 to 2019 volumes. Importantly, most lenders are maintaining their risk profile through moderate LTVs.
“Furthermore, the survey indicates a continuation of the growth of non-bank lenders and choice for borrowers in the marketplace.”
Neil Odom-Haslett, President, Association of Property Lenders, said:
“It is easy to forget that a little over two years ago we were in the first lockdown and many commentators and economists were predicting a very gloomy picture for real estate.
“The report in 2020 perhaps gave us a pleasant surprise in how resilient the lending market was, as we were expecting write downs across the lending community as the impact of Covid and lockdowns took effect.
“The 2021 report really shows how well prepared the lenders were to weather the Covid storm. We can all agree there were bumps along the way and there will continue to be, but to see a strong rise in origination without compromising underwriting standards is really positive.
“It is pleasing that ESG has risen up the agenda with most lenders and borrowers now taking it seriously. We all have a responsibility to address these challenges and collectively we can make a real difference in ensuring our sector takes a leading role.
“The report also shows that the alternative lenders are certainly here to stay, giving borrowers more financing options than ever.”
Adrian Rowland, Director in the Colliers Debt Advisory team, said:
"The Bayes report supports our experience of a renewed appetite for lending across the UK CRE market in 2021, with debt being made available to existing and new borrowers alike – albeit often at lower average LTVs than seen pre-pandemic.
"In 2020 we witnessed a perfect storm created by the effects of Brexit and then Covid which led to the reluctance of many lenders to put new money into the market. This is now hopefully well behind us and borrowers across all sectors once again have a real choice from an increased number of debt providers offering truly competitive terms."
Euan Gatfield, Head of EMEA CMBS and Loan Ratings, Fitch Ratings:
“The last time the interest rate cycle turned sharply upwards was in 2005, which resulted in lending standards weakening as higher-yielding collateral was sourced to maintain interest coverage. The ensuing loan vintages suffered high losses in the GFC. This time round while interest rates are rising from a much lower base, property yields are also generally lower, so as we keep our eye on credit it will be fascinating to track how lenders adapt underwriting to maintain coverage ratios.”
ENDS
Method of Research
Survey
Subject of Research
People
Article Publication Date
5-May-2022