De Montfort University, in its Commercial Property Lending Market report, confirmed industry sentiment that the commercial real estate lending environment is becoming more benign.
The report revealed a number of promising indicators that the property lending market is cautiously emerging from the worst of the credit squeeze, including more favourable lending intentions, a downwards creep in interest rate margins and an increase in the loan-to-value ratios at which people are prepared to lend:
- At mid-year 2013, lenders for banks, building societies and insurance companies showed increasingly positive future lending intentions, with 52% of lending teams intending to increase loan book size and 57% to increase loan originations, against 46% and 54% respectively at year-end 2012. Those categorised as 'other non-bank lenders' were particularly optimistic, with all of those sampled intending to increase both their loan book size and loan originations during 2013.
- Interest rate margins across all sectors meanwhile continued the decline that began between mid-year and year-end 2012 – the first such decline recorded by the De Montfort study since year-end 2006 – and the fall was even more steep in H1 2013. The average margin for loans secured by prime office, for example, decreased from 323.8 bps in year-end 2012 to 280.3 bps at mid-year 2013.
- Increases in LTVs were recorded for loans secured by all prime and secondary commercial property sectors, except for those applied to secondary retail property. The average LTV for loans secured by prime office property increased in H1 2013 from 64.2% to 65.1%, while those for the secondary office property market increased from 58.9% to 60.4%.
Ion Fletcher, Director of Policy (Finance) at the British Property Federation, said:
"Overall the survey's results are indicative of an improving commercial real estate market and offer welcome news for the industry. Observers can expect the 2013 full year survey to be even more bullish, as much of the market positivity we're currently seeing has developed even further since the summer.
“The fall in interest rate margins, the bump in LTVs at which people are willing to lend, and more optimistic lending intentions all point towards a more competitive lending environment in which finance providers are increasingly willing to contemplate transactions outside of London and the South-East. This trend should be supported further by broader economic recovery.
"Interestingly, despite industry rhetoric heralding the ascendance of alternative finance providers, the proportion of commercial real estate debt held by those players hasn't really budged since the 2012 full year report was published. While we may well be moving towards a more diversified commercial real estate lending market, the move is very gradual and nobody should be under any illusions about the speed of change.”
Peter Cosmetatos, Chief Executive of CREFC Europe, said:
“After several years in the doldrums with very little going on, the UK property debt market has staged a spectacular and vigorous recovery during 2013. While the full impact will only be apparent when we have data for the full year, it’s good to see the mid-year report showing the market stabilising and growing more competitive. If anything, this report arguably understates the prominence of non-bank lenders in the market.”
Andrew Goodbody, Vice President, Association of Property Lenders, said:
“It is pleasing to see that the latest research confirms what most of our members are saying, that activity levels are rising and appetite for new business is increasing. The increased level of competition in the market is clearly being reflected by the reduction in average margins and the increasing average LTVs shown in the report. Of equal importance is the fact that the rate of new problem loans has slowed to a trickle and the overall rate of impairment is significantly lower than seen in 2012. Interestingly, the non-banking sector appears to be finding it harder to compete for new business in 2013 given that the top 12 lenders in terms of new originations are all banks or building societies.”
