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UK Commercial Property Lending Bounces Back, But Small Lenders Bounce Higher


 lUK commercial property lending has recovered to pre-pandemic levels but underperforming loans remain high at 9.3% of existing loan books.

So said the latest UK Commercial Real Estate Lending report by Bayes Business School Senior Research Fellow Nicole Lux. Bayes said the figures indicate a steady yet evident recovery of the lending market during the first half of 2021.

New lending for the first half of 2021 reached £23.3B — more than at the same point in 2019. A backlog of transactions that slowed to a crawl in 2020 helped explain the strong bounce back. Year-on-year transaction volumes are up 50%.

Bayes Business School data to June 2021 showed that development lending made up 20% of new origination in the first half of 2021.

Lender uncertainty is underlined by rising margins for prime office loans, up by 12 basis points over six months, and up 22 bps for hotly favoured prime industrial. Loan-to-value ratios are, on average, below 56%.

However, the only lenders still supporting borrowers with secondary retail asset loans are UK banks.

Here are the three major takeaways.

1. Loans underwater

Underperforming loans remain at 9.3% of outstanding loan books. 

Unpaid principal and interest at maturity were one of the most frequently cited reasons for loan breaches and defaults. The average default amount across all lenders was 5% but the weighted average default rate of portfolios of larger lenders (over £5B) is 4.8% compared with smaller lenders (under £1B) of 11%. Including all nonperforming or sub-performing loans these have increased to £8.2B.

In terms of new lending, issuance of unsecured bonds by property companies and commercial mortgage-backed securities bond issuance has picked up.

Whilst the new-lending numbers looked better, Bayes cautioned that much of the lending activity was restructuring and refinancing loans on hold during 2020. This accounted for 50% of lending, while the other half was new acquisition financing.

2. UK banks lead, German banks pull back

UK banks were the busiest lenders, accounting for 37% of the lending market in the first half of 2021. This is sharply down on 49% in 2019.

Other lenders, primarily including debt funds, were the second strongest lender group, providing 24% of new financing in the first half of 2021. 

Overall, together with insurance companies, which have also doubled their origination volume compared to 12 months ago, these lenders were the strongest originators. 

German banks have pulled back substantially from the UK lending market given their long-term historic significance, down from 8% of the market in 2019 to just 4% today.

“Debt funds seem to be stepping up their market importance, accounting for almost a quarter of new origination and shifting from mezzanine lending to whole loans, often enabled by back funding from the banking sector,” CREFC Europe Chief Executive Peter Cosmetatos said. “Also striking are the emerging sector preferences of different lender types, with UK banks favouring lending to residential over the prime offices still preferred by German banks, and the higher-yielding office financing provided by debt funds.”

Loan origination by lender group to H1 2021

3. Smaller lenders take centre stage

Lending activity was particularly strong among lenders with smaller balance sheets. In the first half of 2020, large balance sheet lenders accounted for 59% of new origination. In the first half of 2021, small to midsized balance sheet lenders accounted for 44% of new lending, with 45% of their lending used to refinance loans from other lenders. Bayes said this shows the market has been resilient and responding to changes in lending activity through different lender groups. 

Investec, which announced lending figures today, make a good case in point. Its private client lending team has provided over £225M, across 25 loans, since 1 April 2021. The average loan size is £10M, up from £6M last year, as the team looks at larger asset sizes in the private client space. The largest loan so far has been £40M.