Lenders continue to seek new business through


The last Bayes UK Commercial Property Mid-Year Report 2022 shows new lending volume of £23.7bn, indicating a strong appetite for new business through June 2022 before deal flow begins to dry up. In a radically different interest rate environment, lenders are ready to pass up new opportunities for the second half if it is not a good one.

Findings by Doctor Nicole Luxlead author and lead researcher at Bayes Business School (formerly Cass), show that the alternative lender segment has now seen twelve years of continuous growth, with an average growth of 15% per year.

The report uses data collected from 79 major UK lenders and indicates a further increase in business development finance, with lenders confirming their financial support for assets in transition, zero carbon assets and assets with environmental, social and environmental credentials. governance (ESG) clearly improved.

Key highlights from the report, which covers data through June 2022, also show:

  • Development loans made 22 percent re-creation in 2022, showing a further increase in commercial development finance, which for the first time, post-pandemic, includes speculative development finance.
  • Loan funds have undertaken larger-scale asset transition projects and provided 72 percent business development funding.
  • Prime office loan spreads squeezed by five basis points (bps) over six months, showing the strong competition in the market during the first half of 2022. However, for the other types of properties, the 60% loan-to-value ratio (LTV) margins increased by five and ten basis points.
  • Concentrated small and medium-sized lenders 89 percent of their loans in the financing of residential development, the “other lenders (debt funds)” providing 25 percent new residential development loans and UK banks providing 58 percent.
  • In general, smaller lenders have been less likely to refinance existing borrowers and therefore have the lowest customer retention rate, generating most of their business from new acquisition loans.
  • Underperforming and defaulted loans have remained stable for the time being, with an average default rate of three percent.

With the announcement of interest rate hikes in January 2022 followed by the onset of the energy crisis linked to the outbreak of war in Ukraine, UK government bond issuance fell to a low of £4 billion during for the first half of 2022, according to the Bayes Bond Monitor.

The high additional cost of debt is forcing developers and real estate companies to shift their business models from a debt-financed acquisition model to a small-cap owner/investor model. Some developers consider financing new construction with 100% equity.

UK banks dominated their own market, providing 35% of new funding, followed by debt funds which held a 24% share. Together, alternative lenders (loan funds and insurance companies) originated 38% of new loans. On the other hand, international banks have seen their market share gradually decline from 34% to 28% over the past 10 years. Overall, the 12 largest originators were responsible for 58% of new loans, five of which were UK banks.

A significant price gap also remains between the largest and smallest balance sheet lenders, translating into a price gap of 0.8% for prime offices. For example, spreads on prime office lending for the largest lenders average 1.98%, while borrowers can expect to pay an average lending spread of 2.77% when ‘they borrow from small lenders.

When asked broadly about lending appetite for 2022, office and prime industrial are the two real estate sectors most lenders are willing to finance (93% and 85% respectively), followed by prime residential investment order (81%).

Doctor Lux said:

“Interest payments and property income were approaching a 1:1 ratio in June 2022, and with the five-year Sonia swap reaching 5.2% at the end of September 2022, property income will only be insufficient to refinance some properties at these rates, leaving a potential financing gap.

“Our analysis shows that net property income yields must increase to more than 6% across different property types, or property values ​​must adjust downward by 25-35% to reach a new market equilibrium. .”

Peter Cosmetatos, Managing Director of CREFC Europe, said:

“Economic and political conditions have changed very rapidly since the end of the period covered by this research, but it is valuable to have this detailed picture of the state of the market at what can mark the end of an era and the The start of another.It depicts a stable, broadly funded market, with debt funds and insurers together accounting for 38% of new start-ups and overtaking UK banks and building societies for the first time.

“It remains to be seen whether the market will be as resilient to the consequences of geopolitical turmoil and higher interest rates as they were to Brexit and Covid, and who is best placed to finance the reallocation and decarbonisation that ‘much of the country’s real estate needs.’

Paul Coates, Head of Debt and Structured Finance, CBRE Capital Advisors Ltd, said:

“The Bayes report continues to demonstrate the diversity and depth of liquidity in the UK lending market, which should provide reason for confidence going forward.

“As of the date of the report, some of the macroeconomic and geopolitical challenges were evident and have accelerated in recent weeks, which the lending market (and the broader real estate market) is pricing in.

“In the short term, we are seeing a flight to quality, whether it is sponsor strength and/or asset quality, some moderation in leverage to maintain leverage ratios debt service and some margin increases reflecting the broader environment.

“In a higher interest rate environment, credit strategies offer a solid risk-adjusted return investment for many institutions. We know increased allocations are happening, so I expect we’ll continue to see lender liquidity available in the market, from all types of lenders, with variations at the micro level, as individual institutions define their own strategy regarding their order book and their risk/return appetite. .

“Against this backdrop, I would expect to see tenders for the strongest deals, and the continued trend of lenders’ focus on sustainability (through environmental, social and governance measures) .”

Neil Odom-Haslett, President of the Home Lenders Association, said:

“At the beginning of the year there were already a number of signs that the real estate market was getting a bit overheated and the Russian invasion of Ukraine certainly accelerated this (rising inflation and rising interest rates interest to name just two of the headwinds).

“In the first quarter, there was a crossover when the overall cost of debt exceeded the net initial yield on real estate across many asset classes, which generally suggests this cannot be sustained indefinitely (unless in the event of strong rental growth), and that it is likely that there will be a valuation correction at some point in the future.

“The report suggests that a number of lenders continued to lend despite this and just as we were reaching the top of the market (the consensus view is that the valuation peak was in June). However, the report says they’ve maintained their underwriting discipline (for the most part) with max LTVs for senior debt at 60% (so they’re unlikely to see the distress of previous cycles) I’m slightly surprised though that there has not been more stress and distress in development lending with cost inflation and supply chain issues – this will perhaps follow in the second half of 2022 and into 2023.

It’s really nice to see lenders taking ESG and net-zero carbon goals seriously and incentivizing borrowers to upgrade their properties. We all have our part to play and it seems like we all do.

As for H2, I have a feeling it will be very different from H1.

Euan Gatfield, Head of EMEA CMBS and Loan Ratings, Fitch Ratings, said:

“High inflation, sharp increases in forward bond yields and continued caution over prime loan-to-value ratios make this stage of the interest rate cycle look different from 2005/06, the last Second, the pressure on interest coverage caused many lenders to turn to high-yielding, low-quality collateral, the kind that caused nearly all of the losses in the global financial crisis.

“This time around, the rationing of administered credit on the capital markets is curbing risk taking much more quickly. Despite or perhaps because of this, properties whose rental yields have not normalized during the pandemic – and in the case of industrials, have actually plunged to record lows – will face significant value correction at as debt financing becomes significantly more expensive.

Aparna Sehgal, Partner, Dechert LLP, said:

“The Bayes data results indicate the strength of lender and investor confidence in UK property. The amount of capital deployed and the continued focus on development, as the economy emerged from the distortions of the era, were a welcome indicator of appetite for the asset class across the capital stack.While H2 2022 data will likely be quite different, what we see in these results shows resilience and a commitment to investing in the UK property sector, which is reassuring.



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