Commercial property debt falls mid-year

The half-year De Montfort Commercial Property Lending Report observed a 'significant rise' in new lending to the sector in the first half of 2014. It noted that lending is increasingly coming from organisations other than UK banks and building societies, and at better terms for borrowers. It also found a significant drop in the volume of old loans that were distressed or in breach of financial covenants.

However, it noted that this recovery was weighted towards the capital, with lenders more willing to lend against assets in London than the rest of the country, or against investment properties rather than new development.

New lending accelerated during the period with £19.6bn of new lending – the highest total recorded by the study since 2008 – compared with £13.4bn in the first half of 2013 and £29.9bn for the whole of 2013. However, it noted that the increase in activity generally in the commercial property market was not “debt fuelled to the same extent as occurred before the financial crisis’’ when, for example,  £49.2bn of loan originations were completed in the first half of 2007. It is "initially, therefore, most probably equity driven”.

The half-year results found that at mid-year 2014, two-thirds (66.5%) of outstanding debt had a loan-to-value ratio of 70% or less, compared with 63% at year-end 2013. Outstanding debt with a loan-to-value ratio of between 71% and 100% fell to 16%, compared with 18% at year-end 2013.

The report also found the lending market becoming more diverse, with UK Banks and Building Societies representing 36% of new origination at mid-year 2014. That compares with 43% of new lending in 2013, and a share of 54% of the existing stock of outstanding loans.

The decline in interest rate margins which began mid-year 2012 continued during the first six months of 2014, although there are signs it may be levelling off. The average margin for loans secured by prime offices was recorded at 226.5bps – a decline of 26.4bps from year-end 2013. For loans secured by secondary offices, average interest rate margins declined by 28.8bps to 275.7bps.

Liz Peace, chief executive of the British Property Federation, commented:

“The outlook for debt finance to support the commercial property market is very positive. The steady reduction of outstanding debt, and of loans with dangerously high loan-to-value ratios, is very encouraging. 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.

“However, we are concerned about the potential implications of the lack of debt finance available for speculative development. 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. Speculative projects are often the only ones that cater to this type of enterprise.”

Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council (CREFC) Europe, said:

“The recovery in commercial real estate debt markets, so long delayed, has been dramatic now it’s finally here. It’s good to see the focus of the De Montfort report increasingly shift from legacy problems to a diverse and growing lending market. It is to be hoped that ongoing regulatory developments support a period of healthy growth rather than undermining or distorting it.”