Commercial property debt falls
Outstanding commercial property debt is on course to fall to a 10 year low during 2015, declining by 1% in the first half of 2015 to £163.7bn, according to academics at De Montfort University. However, strong levels of new loan origination in 2015 mean that the total amount outstanding may actually increase for the first time since the recession.
The half-year edition of the De Montfort Commercial Property Lending Report, the most comprehensive study of the UK’s commercial property lending market, concludes that the continuous decline in total real estate debt since 2008 “appears to have almost halted and may subsequently be reversed by year-end”.
The value of new loan originations in the first half of 2015 was £24.7bn. This was the highest half year value reported to the research since £49.2bn recorded for the first half of 2007. In a further sign of commercial property market health, the value of distressed loans fell from £23.2bn at year-end 2014 to £15.7bn at mid-year 2015.
The proportion of loans with a loan to value (LTV) ratio of less than 70% has continued to grow in the first half of 2015, representing 80.5%, of £135.5bn, of outstanding debt of the traditional lenders and allocated to investment projects. Outstanding debt with a LTV ratio of between 71% and 100% fell from 14.3% of the total, (£20bn) at year-end 2014 to 12% (£16bn) at mid-year 2015.
The first half of the year also showed an encouraging pick-up in development finance, particularly for speculative or partly pre-let projects, where more non-traditional lenders now feel comfortable providing finance against such schemes. At the same time, the research suggests that banking regulation may be having an adverse impact on development finance by the traditional lenders. At mid-year 2015, only 2.8% of debt was allocated to commercial development projects by these lenders.
Interest rate margins for senior debt continued their three-year long decline but the pace of decline has moderated considerably. At mid-year 2015, the average margin for senior loans secured by prime office property was recorded at 214bps, down from 218.7bps recorded at year-end 2014. The report suggests that that “the floor in interest-rate margins may have been reached”.
Following a surge in non-traditional lenders in 2014, Banks and Building Societies remained the dominant lenders in the market, holding 76% of all loan originations at half-year 2015, compared to 75% at year-end 2014. The level of new lending by UK banks and building societies remained stable at 39% of all loan originations.
Ion Fletcher, director of policy (finance) at the British Property Federation, commented:
“We seem to have reached a turning point in the amount of commercial property debt in the market, with the impact of post-crisis deleveraging almost totally cancelled out by new lending. While this suggests things are ‘hotting up’, a stabilising of senior debt margins and broadly level LTV ratios indicates lenders remain risk-conscious.
“We are also encouraged to see increased lending to speculative commercial property development projects. These are crucial if we want SMEs to have room to grow their businesses.”