New lending to commercial property increased by over fifty per cent and reached a six-year high in 2014, as non-traditional lenders entered the commercial real estate (CRE) market at record levels.
The value of commercial property loan originations soared to £45.2bn at year-end 2014, compared with £29.9bn in 2013, the highest figure since new lending reached £49.82bn in 2008, according to the independently compiled De Montfort Commercial Property Lending Report.
The most comprehensive study of the UK’s commercial property lending market showed that 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.
At year-end 2014, insurance companies and other non-bank lenders accounted for 25% of new loan originations. Outstanding debt also saw increased diversity, with insurance companies representing 12.7% of the total debt, up from 10.2% last year, and other non-bank lenders representing 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”.
The market seems mostly to have worked through the legacy of pre-crisis loans that characterised the last few years. The value of distressed loans more than halved in 2014, falling from £44.7bn at year end 2013 to £21.1bn at year-end 2014, supported by a strong recovery in the underlying property market as well as an improving UK economy more generally.
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.
Lending intentions remained strong, with 82% lenders intending to increase their loan book size and 84% intending to increase loan originations.
As property values have risen so has the proportion of debt with a loan-to-value (LTV) ratio of 70% or less. Such loans made up 76.7% of the outstanding debt at year-end 2014, compared to 63% so reported at year-end 2013 and 52% at year-end 2012. Outstanding debt that had a LTV ratio of between 71% and 100% continued to fall, reducing from 18% at year-end 2013 to 14.3% at year-end 2014.
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.
Melanie Leech, chief executive of the British Property Federation, commented:
“The CRE lending market recovery is now well and truly established, with the further reduction of outstanding loans and the significant fall in the number of distressed loans indicating a healthier and more competitive market than we have seen for years.
“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.
“We are concerned to see a reluctance to lend to speculative development, however. This is of particular importance for SMEs, whose growth we fear could be constrained if there is not readily-available business space to suit their needs.”
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.”