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Lenders’ Expectations presents forward looking analysis to 2011
Jones Lang LaSalle has published a survey-based analysis of the UK banking sector’s approach to commercial property lending between now and 2011. Although banks that are lending are positive in their outlook, some respondents are disappointed by activity levels due to the lack of quality stock available to lend against. There is a range in the amount lenders can lend. The majority of banks (35%) are prepared to lend between £25m and £50m with 30% prepared to lend between £50-£100m. Currently 16% are prepared to lend £10 - 25m and 12% over £100m. Loan terms are typically 3-5 years, with almost 50% of lenders offering a five year term. Loan sizes are growing and 26% of respondents expect £100m+ deals to be available from their bank at the end of 2010 and 48% at the end of 2011.
Jeremy Handley, director in Jones Lang LaSalle’s Valuation Advisory team said: “As the debt markets free up and the real estate investment market also improves, debt providers are more prepared to lend, albeit only on the properties they are comfortable with. What we have now is dramatically different to the situation we had at the beginning of the year, and lenders are now finding they have more money to lend than the market can absorb. The key issue for both lenders and investors are the same – availability of suitable stock.”
Jones Lang LaSalle Lenders Expectations analysis features the following highlights:
Selected banks are willing to lend – well capitalised banks are willing and able to lend, believing there is a great opportunity to grow market share. These tend to be the German banks and are focused on prime stock. They are, however, struggling to match the completion speed of faster moving cash buyers and, as vendors are increasingly unwilling to sell in an improving market, are finding their clients frustrated by the lack of new lending/buying opportunities.
Loan to Values are unlikely to increase – Loan to Value (LTVs) are unlikely to increase in the short term from 65% and will be kept rigid by credit committees. Interest Cover Ratios (ICR’s) are more important with banks focused on maintaining multiples of 1.4.
Speculative development finance will be unavailable in the short term – banks’ attitudes to risk are unlikely to change within the next 12 months. Lenders are also concerned about the risk presented by variable income, particularly on turnover leases, which are difficult to underwrite in the current environment. Many banks will limit the amount that they lend against the turnover element of rents as opposed to regular rental income.
Release of product – some distressed real estate assets will be released by many lenders but there will not be a flood of product. Prime asset sales will be offered to the direct market but partnering is the preferred route on more volatile assets for NAMA, RBS and HBOS as well as some building societies keen to participate in the upside.
Andrew Hawkins, director in Jones Lang LaSalle’s City Investment team said: “Investment supply in the UK will increase as the downward correction in yields encourages some banks to take ‘cash off the table’ as LTV's refloat but the UK market will not be flooded with assets. Assuming current levels of demand, product scarcity will persist, maintaining downward pressure on yields.
“The downside risk is more macro in terms of the potential continued latent exposure of the UK banking industry which coupled with more rapid tenant failure next year could see a more volatile destabilised investment market and rising yields as a possible scenario. That said we believe buyers will comfortably outweigh sellers in the core prime markets such as central London.”
Barry Osilaja, director in Jones Lang LaSalle’s Corporate Finance team concluded: “Speculative development finance will continue to be unavailable in the short term. Only developments with significant levels of pre-letting will be able to attract funding. Speculative lending will only begin to return in significant quantum when banks perceive that the risk profile of speculative development is appropriate for the returns that can be achieved. Where banks already have debt outstanding against stalled developments, lenders may be prepared to reschedule loans, allowing developments to proceed whilst providing themselves with a priority return and participation in the equity upside.”
Editors Notes Jones Lang LaSalle’s Lenders’ Expectation Survey is the product of 30 detailed questionnaires and seven face to face interviews conducted with key banks in the UK during September and October 2009.
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