Skip to content
Freeths - Law firm
News Commercial Contracts 1st Jul 2016

New loans for commercial property reach 8 year high

Confidence has returned to the commercial property lending market as new loan originations hit a post-crisis high and the value of outstanding loan books saw its first increase since 2008, new data from De Montfort University has revealed.

Results of the latest research were presented to more than 50 IPF members and guests at a seminar held at the Nottingham office of law firm Freeths. Guest speakers included Bill Maxted of De Montfort, author of the report, and Mike Birch, Chief Executive of Europa Capital Mezzanine. The event was chaired by David Smith of Strata Real Estate, also a Midlands IPF board member.

The total amount of outstanding debt at year-end 2015 was £168.4bn, representing a 1.9% increase from £165.2bn at year-end 2014, and the first increase recorded since 2008. Overall, £53.7bn of loan originations were recorded during the whole of 2015, compared to £45.2bn in 2014.

Further evidence that the market has recovered can be seen in the decline of almost 50% in the value of distressed loans (those in default and in breach of financial covenant). At year-end 2015, the value of distressed loans reported to the research was £12.1bn, compared to £23.2bn a year earlier and £47.6bn at the end of 2009.

Loan to value (LTV) ratios on existing loans continue to fall, reflecting the rise in commercial property values and banks continuing to lend on similar terms to recent years. At year-end 2015, 87.5% (123.5bn) of outstanding debt had a LTV ratio of 70% or less, compared to 77% (£107bn) at year-end 2014 and 63% (£99bn) at year-end 2013. Outstanding debt with a LTV between 71% and 100% represented 7.5% (£10.6bn) of the market, and just 5% (£6.9bn) had a LTV greater than 101%. Notably, average lending LTVs fell during the course of 2015 for all sub-sectors, suggesting good lender discipline despite the strength of the market.

Although they still dominate the market, UK banks and building societies saw their market share continue to decline. They represented 34% of new loan originations at year-end 2015 – the lowest level ever recorded by the research – compared to 39% the previous year. The proportion of outstanding debt held on their books also fell, from 49% of the total at year-end 2014 to 45.5% in 2015.

For the first time, insurance companies were the second largest category of new loan originators, representing 16% (£8.57bn) of the total in 2015. The exposures of insurance companies now account for 15.1% (£25.4bn) of the market, compared to 12.7% (£21bn) in 2014.

Regional distribution of outstanding loans showed a strong bias in favour of central London; 43% of the total outstanding debt is secured against real estate in the capital city, the highest result ever recorded by the research, and a dramatic increase from the 26% recorded in 2010. This indicates a strong appetite by lenders (particularly those from overseas) for exposure to the UK’s capital.

Despite an overall increase in loan originations, the value of new development finance fell from £2.4bn in 2014, to £2.25bn in 2015. Banks, building societies and insurance companies increased their loan originations for commercial development projects from £1.57bn in 2014 to £1.95bn in 2015, but non-bank lenders saw a decline, from £0.8bn in 2014 to £0.3bn in 2015.

The 2015 report demonstrated lenders’ continued preference for big ticket lending to both development and investment projects. Only fourteen banks (30%),building societies and insurance companies were prepared to write a loan of £5m or less for commercial investment projects, compared to thirty-one (67%)who would do so at above £100m.

The research also highlights how the loan distribution market has changed behind the scenes. Securitisation remains in the doldrums, while syndication goes from strength to strength, with the value of loans syndicated roughly doubling for the second year running to £9.2bn (up from £4.7bn in 2014 and £2.1bn in 2013). There were also marked increases in the numbers of respondents syndicating and participating in syndications, to 20 (from 12) and 28 (from 24) respectively.

Mike Birch said:

“Whilst the De Montfort report evidences that confidence has returned to the commercial property lending market, there remains a shortage of funding for many portfolios located across the UK and let to a wide range of tenants on relatively short leases.

Given tighter bank regulation and lower loan to value lending, some borrowers need additional equity or mezzanine debt. At present there are few mezzanine providers to fill the gap”.

Darren Williamson, Nottingham based national head of real estate at Freeths said:

“The lending market continues to be reshaped post 2008; whilst deals will be looked at by funders outside of London they need to have strong fundamentals to progress. The De Montfort report shows that deals have to be in the right place, with the right parties and of the right size to get off the ground. Frustrating for some but re-assuringly prudent for others”.

Darren Williamson, Partner & National Head of Real Estate

Author: Darren Williamson

Partner & National Head of Real Estate

Related Services

Commercial Contracts

Client service

‘Doing the right thing’ is at the heart of Freeths. Find out more about our excellent client service and the strong set of values that guide the way we work.

Our service

arrow

Talk to us

Freeths are a leading national law firm with 13 offices across the UK. If you have a query about our services or just want to find out more, why not give us a call?

Contact: 03301 001 014

Choose an office:

Portfolio close
People CV Email

Remove All


Click here to email this list of people to a colleague.