London: UK’s commercial property lending volumes have hit the highest level since the financial crisis in the first six months of 2014, as debt begins to creep back into the market, according to new research.
Banks’ lending against commercial property is still falling, but alternative lenders are rapidly ramping up their activity, the study by academics from De Montfort University found. Loan volumes hit 19.6 billion pounds in the six months to the end of June, up from 18.1 billion pounds in the same period the previous year.
Only a third came from UK banks and building societies, down from 43 per cent in 2013. Institutional investors, debt funds and other asset managers took nearly a quarter of the market, up from about 5 per cent just three years ago. International banks made up the remainder.
Pension funds and other institutional investors have traditionally focused on direct property investments rather than debt funding. But that is beginning to change as the weight of money seeking real estate assets forces investors to try to diversify.
Standard Life Investments recently launched its first real estate debt fund, while last month investment manager Venn Partners backed the construction of two residential towers in East London. Some 86 per cent of lenders told De Montfort that they wanted to increase their property lending.
This growing availability of finance means that borrowers are able to access better terms, and high loan-to-value debt from the financial crisis is being refinanced on more favourable terms, the researchers found.
Just 4 per cent of outstanding loans — totalling 6.5 billion pounds — were in breach of their covenants in mid-2014, down from 9.7 per cent at the end of 2013.
Research by property debt investment manager Laxfield Capital last month found that nearly a quarter of new financing requests in the six months to November came from borrowers wanting to refinance deals they had signed in the aftermath of the crisis, in order to get better lending terms.
“Whilst it can be concluded that commercial property lending generally is in recovery mode, it is important that all lending organisations maintain their discipline and do not lose sight of risk in the loans they are prepared to write,” report author Bill Maxted said.
Liz Peace, British Property Federation chief executive, said the outlook for borrowers seeking debt was “very positive”. “The steady reduction of outstanding debt, and of loans with dangerously high loan-to-value ratios, is very encouraging,” she said. “Although new lending is growing at a significant rate, the fact that the market seems to be mainly equity-driven means that we are unlikely to be living through another 2007.”
Peace called on lenders to back more speculative development schemes — one of the riskiest areas of property lending, because of the danger of fuelling an oversupply of new construction. “While lender caution in this area is totally understandable given events in the past few years, there are parts of the country where new, high-quality business space is urgently needed, particularly for SMEs,” Peace said.
Only a quarter of lenders were prepared to back new developments which did not have a tenant in place, De Montfort found.