Quality of Commercial Property Lending in the UK ... - Finance Enquiry

The recent publication of the two leading annual reports by De Montfort and Savills on UK Real Estate Lending provides detailed insight as to the trends of who is lending against what in the UK Commercial Property world;

? The De Montfort survey provides empirical numbers behind the much talked retrenchment of banks from the senior lending space in 2011, with only 44% of institutions they survey intending to increase loan origination in 2011. The flipside of only 44% of institutions increasing loan origination is, of course, 56% intend to contract;

? While the flare-up of sovereign issues in 2011 is undoubtedly a cause of bank retrenchment, the scaling back of UK Lenders is particularly acute with only 27% of UK Lenders (including Building Societies) intending to increase origination of loans against UK Commercial Property. Clearly the higher base (UK Lenders represented 52% of 2011 originations) from which to fall is a major reason, but we cannot help but feel the much reported emphasis of the FSA on movement to a slotting regulatory regime is also a cause;

? All told at Year End 2011 the De Montfort survey recorded almost a ?perfect storm? in terms of current commercial lending, with margins at the widest levels, and LTVs at the lowest levels, they had ever recorded;

However, we take a slightly different point of view to what we believe is the current consensus there is a shortage of lenders prepared to lend against real estate in the UK. Rather, we see a ?Flight to Quality? occurring, with lenders being very selective on what and who they lend to in the UK. The end result is that debt capital is relatively available (at a price and low LTVs by historical standards) for Prime South East properties, but severely restricted outside this bucket. We do not see the much reported entrance of insurance companies into the sector changing this ? if anything it will reinforce it. In our opinion a necessary pre-requisite for real estate lending returning against a broader type of asset is a pick-up in general risk appetite;

? Who are the winners in this situation? Clearly anyone with money to lend against property, who can pick up unprecedented risk adjusted returns in the sector (wider spreads, lower LTVs). In terms of borrowers, those with exposure to prime assets are at a relative
advantage (access to finance, albeit at wider spreads) to their peers.

Paul Heaton, CFA
Research Analyst

Conor O?Toole
Research Analyst

Deutsche Bank

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