Property Lending Market Polarised

At 3 recent regional IPF seminars, Kingfisher’s William Maunder Taylor has responded to presentations of the De Montfort Banking Survey given by Bill Maxted. He argued that the UK commercial property lending market is becoming increasingly polarised between big ticket overseas lenders and UK banks whose appetite is restricted by non performing legacy loans.

New lending secured on UK commercial real estate for the year ending December 2012 was estimated to be £25.4 billion by the survey. This is down from £27.5 billion in 2011. Analysis of the data below reveals that the market has become polarised according to both loan size and lender type. Half of new lending was for loan sizes of up to £20 million. UK banks and building societies provided £12 billion and other lenders provided just £2 billion. At lot sizes of less than £5 million the market was totally dominated by UK banks and building societies with an insignificant contribution from others.



The picture is very different for lot sizes above £20 million. Here the survey recorded £4 billion of new loans from German lenders, £1.5 billion each from US lenders and international lenders, with insurance companies taking a significant share and UK banks and building societies the remainder. The level of competition at this end of the market is healthy.

The implications of this polarisation are stark. It is the UK banks who are worst affected by legacy issues and the survey reported that some £45 billion (23% of the total loan book) remains under water at LTVs in excess of 100%. Not only are further sizeable losses likely as secondary values continue to fall, but new regulation and, in particular, “slotting” will also require UK banks to hold substantially increased regulatory capital in respect of weak legacy loans. We estimate that the increased regulatory capital requirement will be circa £14 billion and there will be write off losses to be absorbed as well. The Prudential Regulation Authority’s view is that slotting brings confidence and stability to the market. However, the risk of loans secured on secondary property migrating during the loan term into a slot requiring additional regulatory capital will discourage lenders from accepting secondary property as security. This together with the lack of interest from international lenders and insurance companies in smaller loan sizes means that the lower LTV’s for sub £20 million loans are here to stay and margins are likely to remain high due to lack of competition. Both of these factors will hit the availability of debt to the regions, as is being reported to the survey by lenders.

In the £20 million plus loan category there is a wholly different story. There is healthy competition and fewer lenders are constrained by legacy issues or UK regulation. We are already seeing margins edging down and LTVs increasing and we expect this trend to continue as more lenders compete for fewer large sized loan opportunities.

As happened following the 1991 crash, there is a particular shortage of development finance and we do not expect terms to improve in this market until lenders are more active.

One year ago there was an expectation that non-bank lenders would be a new source of much needed competition, with senior debt funds chief amongst them. Their recorded activity in 2012 amounted to just £1.3 billion of which £800 million represented mezzanine finance. Until the CMBS market reopens and provides an exit for their loan books and an ability to churn equity, we doubt they will have a significant impact. There have been just two CMBS issuances since 2007 and the market is dogged by lack of credibility; both on account of the role of the rating agencies in the crash and the volume of secondary assets securing so much of historic CMBS issuance. When the CMBS market does reopen, we expect it to focus on prime security and borrowers. It will be challenging for non-bank lenders to access this market as an exit for the loan portfolios they assemble.


Some of our recent assignments include arranging finance for the following...

Mixed Use Investment, Richmond
Not all lenders are willing to take out other lenders’ impaired debt. In this instance, the debt had been bought from a clearing bank by a vulture fund and the client was keen to regain control. We raised a senior debt facility of £3.25 million, representing 50% LTV, in spite of the income being short term. The lender relied on the intention of one of the 2 tenants to renew, interest from a leading fashion house in the remainder of the property and its prime location.

Office Investments, Bournemouth
Acting for an asset manager whose niche is the repositioning of older office buildings to make them suitable for back up operations, we have arranged finance for two office buildings in Bournemouth. Both were multi let on short term leases and we arranged loans at an average 65% LTV.

Mixed Use Portfolio
Portfolios are proving popular with lenders due to the spread of risk. We have raised a loan of £40 million for a portfolio of some 50 properties at an LTV of 63% and sub 3% margin.

Childcare Nursery, Twickenham
Kingfisher Property has raised finance for the acquisition of this freehold childcare nursery in Twickenham. A senior debt facility of £975,000 representing approximately 65% of value was achieved for an overseas investor.

Portfolio of Prime Shops
The appetite amongst lenders for loans secured on retail properties is constrained. We have recently placed a loan of circa £3 million, secured on a portfolio of well let lock up shops in good towns and prime locations at a margin of under 3% p.a. Whilst the LTV was only 50%, significant amortisation was required from the outset and was influenced by the average weighted unexpired term of the occupational leases.

St Catherines Place Shopping Centre, Bedminster
This property comprises a secondary shopping centre with redundant 25,000 sq ft office building previously occupied by the Government just off East Street, Bedminster, a suburb 1 mile to the south of Bristol City Centre. The angle was the redevelopment of the offices into residential, for which no consent existed.We identified an equity investor to partner a local developer in what will ultimately be an £18 million development and then introduced a bank to provide a loan to help finance acquisition, relying on income from the shopping centre for debt service.



William Maunder Taylor

william@kingfisherproperty.co.uk



James Maunder Taylor

james@kingfisherproperty.co.uk




Simon Drewett

simon@kingfisherproperty.co.uk

41–43 Maddox Street,
London W1S 2PD

T 020 7491 0380
F 020 7491 9202
www.kingfisherproperty.co.uk

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