Interest rate rises represent the next potential risk to UK lending according to respondents to the latest annual UK Commercial Real Estate Lending report.
The survey used to be carried out by De Montfort University, and the 2017 report published today, 27 April, has been produced by new host, London University’s Cass Business School, for the first time.
It finds that lending activity last year was exactly the same as 2016, with total new origination of £44.5 bn (€51 bn), and with the second half of 2017 much busier than the first. There was £26.8 bn of new lending in H2 17 compared with £17.6 bn in H1 2017.
Refinancings were a lower proportion of the total than the previous year, when UK transactional activity was depressed by the Brexit vote; development lending was up sharply; debt funds and insurance companies now make up almost a quarter of the market (24%); and pricing and loan-to-values were relatively stable.
Nicole Lux, the report’s author, said comments from the 76 respondents suggest that any near-term risk is expected to come from interest rate hikes. The financial markets are expecting the Bank of England to raise the UK rate above 0.5%, possibly in May, in what may start a period of rate ‘tightening’ for the first time in nine years.
Separately, market sources say that the Bank of England’s Prudential Regulation Authority (PRA) has recently been in contact with UK real estate lenders to ask them whether they are prepared for higher rates.
Rising interest rates' effects
While the report stresses that average loan to value ratios remain low - 78% of the total outstanding loan book of £199 bn is held in loans with LTVs below 60% - a rise in rates ‘is going to have an impact on debt servicing levels for unhedged floating rate loans’, the report says. The amount of unhedged floating rate debt reported to Cass is currently £28 bn, or 18% of total debt books.
Lender feedback, Lux said, is that more of the refinancing activity is now prompted by borrowers’ view on the changing interest rate outlook rather than banks merely seeking to keep business up as they did in 2016.
She said: ‘Borrowers are trying to arrange new finance now and take out as much equity as possible until interest rates go up. Everyone is going short, no one wants a long-term loan. They are refinancing early, with lenders saying that two years after writing the business the loan is already gone again.’
PropertyEU’s sister title, EuroProperty, revealed in February that Cass University wishes to extend the UK survey to new countries, with France and Spain top of the list. Lux said that the next step is to raise funding.
Other findings in the report are:
• Non-bank lenders such as debt funds were the most active group, increasing their market share from 10% in 2016 to 14% in 2017. When combined with direct lending by insurance companies this takes non-bank lending in the UK to 24% or almost a quarter of the market
• Development lending reached a new peak with £22 bn of loan books in development finance, of which £8.7 bn was new finance and the majority for residential projects
• Additional funding that was agreed in 2017 for developments but undrawn means more new business was originated last year than is included in the top line, £44.5 bn number
• The average margin for lower leverage funding up to 60% LTV was 188 bps. Mezzanine finance margins for loans against prime properties increased over 2017 by 40-60 basis points
• Retail property is being ‘penalised’ with higher margin and lower LTV