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Rollercoaster Continues for Property Lenders in the UK

Jones Lang LaSalle publishes 2011 Lenders’ Expectations Survey

Bank lending to the property sector is still limited according to Jones Lang LaSalle’s 2011 Lenders’ Expectations report, which surveys key lenders to commercial real estate in the UK. 
Although more respondents this year were willing to lend between £50 millions and £100 million The survey found that less than 40 percent of respondents thought they would be lending amounts above £100 million by the end of 2011, compared with around 50 percent thinking they would do so in last year’s survey.
Jeremy Handley, director, Jones Lang LaSalle Valuation Advisory, said: “The rollercoaster of financial crisis and sovereign debt continues and it seems certain that the European banking crisis is going to have profound and long-lasting implications for the commercial property sector.”
Barry Osilaja, director, Jones Lang LaSalle Pan-European Corporate Finance, added; “Capital value growth has slowed again, with total returns remaining well below their peak levels.  Bank of England lending figures released in February 2011 show lending to real estate over Q4 2010 fell by £16bn to £221bn between September and December, the largest drop since the series began in 1987.  The number of active banks in the property market has also fallen and this will have an impact on the ability to bridge the debt funding gap and consequently put downward pressure on values of secondary assets.”
Other findings from Jones Lang LaSalle’s 2011 report are as follows:
·         Many lenders expect larger deals of over £600m from 2012 when the worst of the economic crisis should be over and the market is expected to pick up again.
·         Refinancing will dominate in the next two years - almost 50% of lending activity has been and will be focused on refinancing. A number of respondents stated that refinancing will consume between 70% and 80% of lending.
·         The majority of respondents cited a maximum Loan to Value (LTV) ratio of between 60% and 70% in 2010, whilst a few believe this will stay below 60% over the next couple of years.  Most see senior debt at 65% and do not expect this to go above 70% in the coming years due to a lack of liquidity, legislation and regulatory changes.  There is a significant increase in the number of lenders anticipating LTVs to increase in 2012 when 37% are expecting these to be above 70%.  None of those surveyed expect to see LTVs above 80% before 2013.
·         For new lending, the office sector is by far the most popular with an average weighting of over 40% for each of the three years.  Lenders see this market, especially in London, as one of the most transparent and easiest to judge, mirroring the institutional interest in direct acquisitions. 
·         Unsurprisingly, lenders are reluctant to take on risk.  The focus is set to remain for prime investments with 68% focusing on these assets compared to 73% in 2009.
·         Several respondents believe that more secondary assets are likely to come onto the market and will become more financeable. Consequently there is a sizeable increase in prospective lending for secondary assets, from 13% in 2009 to 20% this year and further increases in 2011 and 2012.
·         70% of respondents believe the commercial mortgage-backed securities (CMBS) market is not expected to return to pre-2006 levels until after 2014, while a sizeable number of these doubt it would ever return to such levels.  Almost a third of lenders think that the CMBS market will return in 2013.  Club deals and syndications will be the route to debt on larger ticket deals.
Andrew Hawkins, a lead director in City Investment at Jones Lang LaSalle, concluded: “The lending markets are quick to change and fluctuate, and it has become clear throughout our interviews that credit conditions are shifting.  A year ago we were predicting greater liquidity than we are now experiencing and the outlook is similarly challenged.  There is without a doubt a polarising of debt provision – borrowers with strong existing relationships are well placed to access the lending markets, whilst although not impossible for new entrants, the challenges are still there.”