UK commercial property borrowing costs rise
Britain’s vote to leave the EU adds to bank concerns about risk in sector
The cost of borrowing against UK commercial property has risen this year after two years of decline, as Britain’s vote to leave the EU added to banks’ concerns about risk in the sector.
According to the first data on commercial property loans released since the Brexit vote in June, pricing rose by an average of 24 basis points in the six months to September, reaching rates last seen in 2013 and early 2014. The rates charged for riskier loans rose particularly quickly.
Emma Huepfl, co-principal at Laxfield Capital, an investment management firm that produced the data, said that banks had “slowed down over the past 12 months”, offering alternative lenders a chance to step in and offer more expensive debt. “Debt funds and institutional lenders have been quite opportunistic,” she said.
The figures also show a steep drop in overall lending: requests for loans secured against London assets in the period were 46 per cent below the long-term average at £57m, while development lending dropped 25 per cent from a year earlier to £1.5bn.
This was partly because of lower demand, as potential property buyers and developers held back from big deals around the time of the EU vote, and also because of a more conservative approach by lenders, Ms Huepfl said.
“There was a period where there was a lot of uncertainty around valuations, and pricing moved up, particularly in more difficult areas of the market.
“There was a hiatus in the [loan] syndication market and the German lenders also had a pause, but they have come back very strongly in the last few weeks. Core pricing is now being reset and re-established.”
Riskier lending particularly suffered: deals with loan-to-value ratios of 70 per cent or more dropped by almost two-thirds, from £2.4bn to £900m.
One sector had a spike in activity: lending linked to purchases of buildings worth less than £50m. This was boosted by a series of sales by funds available to retail investors, which rushed to withdraw money after the EU referendum, forcing the funds to sell properties. Deals involving these buildings were more than double the previous two-year average, at £1.7bn.
Laxfield monitors formal requests for loans as they are submitted to lenders, including banks, insurance companies and private equity groups, capturing about half of all loans and offering an indicator of fresh trends.
The shifts in the lending landscape follow a warning from the Bank of England that commercial property still posed risks to financial stability, despite having steadied after the initial shock of the UK’s vote to leave the EU.
The Bank’s Financial Policy Committee “agreed that there was the risk of further adjustment in the sector”, according to records of meetings released this month. “This could create financial stability risks, given the reliance of the market in recent years on inflows of foreign capital, and given that valuations in some segments of the market continued to appear stretched.
“An adjustment could result in a tightening of credit conditions by reducing the ability of companies that use [commercial property] as collateral to access finance,” the Bank said.