Ever since 2007 borrowers, lenders and brokers have been looking for some positive signs that the market is on the up and that lenders are regaining their appetite for financing commercial property deals.
Now it seems, having worked through some of the unsustainable debt the industry was carrying, there might be a few rays of light as the main high street banks, together with some more specialised lenders, are aiming to lend more this year than at any time in the current property cycle.
This trend is supported by the recent Q1 2013 data published by the Bank of England. According to its quarterly lending figures UK bank exposure to real estate (the proportion of lending to property as a percentage of total lending) remained stable in the first quarter at 8.2 per cent of all debt.
In spite of continued deleveraging by UK banks, the recent data shows that commercial property lending has remained broadly flat as a result of growing appetite from lenders to finance prime real estate.”
Some lenders are taking advantage of the Funding for Lending scheme, which allows banks to offer more favourable rates of interest, or reduce their arrangement fees thereby removing a major hurdle to investment. This scheme, which has been extended for a further 12 months may help further underpin the market recovery.
The highly regarded UK Commercial Lending Report by De Montfort University, surveying more than 87 lenders that are currently active in the market, also suggests there is reason for some optimism.
The report says that the market is at a turning point, driven by an increased confidence that the market is heading in the right direction and, while at present the banks may not be upping their willingness to take on risk, they are certainly not becoming any more conservative. So it would seem an increasing number of lenders are seeking to lend, albeit on a relatively narrow range of opportunities.
The biggest hurdle now to overcome is the market is being constrained by a lack of investment transactions, as opposed to earlier in the current cycle, when the opposite was true.
So will the increased competition for prime assets and what is regarded as safer bets by the banks push funds to seek backing for more secondary regional markets, which are more in need of liquidity?
The answer is yes, particularly as there is evidence of increased appetite from lenders for lending to regional property, mainly in portfolios, and banks are supporting regional assets by funding the purchase of non-performing loan portfolios.
This is partly down to a lack of desire from investors for regional property and linked to a lack of appetite from lenders, but there is increased interest for porfolios on both counts.
These non-performing loan portfolios are a legacy of the crash but now in a slightly improved market are considered to be re-financeable and therefore secure. As a result the amount of loans held by banks with an loan-to-value ratio above 70% fell from £106bn in 2011 to £92bn.
This indicates that banks are really taking action with loans that are stressed, but where there is still some value in the asset. The further along the road banks get with this, the more they can concentrate on new lending.
Most of the property in these non-performing portfolios is outside the captial and south-east. Just 10 per cent of the loans sold were secured against property in London and 12 per cent in the south-east. Of the remainder, 29 per cent was in the North, 20 per cent in Scotland, 16 per cent in the Midlands and 13 per cent in the rest of the country.
The market would also undoubtedly benefit from a greater volume of good quality commercial properties for sale. If there was more quality stock this would give rise to more commercial property transactions and subsequently increase lending further.
What is perhaps holding back the debt market is the unwillingness from some owners to consider a sale unless they are forced. There is a perception that values will improve and a better return could potentially be realised.
Some secondary stock, which the majority of banks are unwilling to lend on, is also in demand by property investors albeit at discounted values. This is a result of the weight of money seeking a home where an attractive annual return can be obtained.
About the author
Peter Clarke is head of Jones Lang LaSalle's Valuation Advisory Team.
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