Lending on commercial property is hitting volumes not seen since before the financial crisis in 2008.
Figures now available for the first 6 months of 2014 are showing that developers accessing credit is growing again, a further sign that confidence is returning as the UK economy revives.
Kate Allen writing in the Financial Times (FT.com) says bank lending against commercial property is still falling, perhaps not surprisingly given the huge debt overhang in commercial lending the major banks are still grappling with.
However, alternative lenders are rapidly taking up the slack and increasing their involvement in the sector, a recent De Montfort University study has found.
De Montfort University’s Commercial Property Lending Report is the most comprehensive report into commercial property lending in the UK and has become a benchmark industry report for the sector. Since 1997, Leicester Business School at De Montfort University has undertaken twice yearly surveys that are financially supported by 16 prominent organisations within the sector.
According to the FT loan volumes were £19.6bn in the six months to the end of June, that’s up from £18.1bn in the same period the previous year.
But only one-third came from UK banks and building societies, which is down from 43 per cent in 2013.
25% of the market is now being taken up by Institutional investors, debt funds and other asset managers which is up from around 5 per cent just three years ago. The rest is being taken up by international banks.
Traditionally, pension funds and other institutional investors have used their own funds on direct property investments as opposed to debt funding. But this is changing as the amount of money chasing real estate assets is forcing investors to diversify.
Now, 86 per cent of lenders want to increase their commitment to property lending according to the De Montfort report.
Only about 4 per cent of outstanding loans which total £6.5bn were in breach of their covenants by June 2014, a figure which has dropped from 9.7 per cent in December 2013.
This growing availability of credit finance means that borrowers are now accessing better loan terms, and the overhand of high loan-to-value debt from the credit crisis is being refinanced on more favourable terms, the the authors of the De Montford report found.
Liz Peace, British Property Federation chief executive, has said that the outlook for borrowers seeking debt is “very positive”.
“The steady reduction of outstanding debt, and of loans with dangerously high loan-to-value ratios, is very encouraging,” she said. “Although new lending is growing at a significant rate, the fact that the market seems to be mainly equity driven means that we are unlikely to be living through another 2007.”
Despite the optimism, BPF have found that only one-quarter of lenders are prepared to back speculative schemes; that is without tenants in place. Ms Peace has called for more speculative development as she says there are parts of the country where new, high-quality business space is urgently needed.