real estate finance
The summer of change?
15 June 2011
In our last real estate update, we looked at emerging trends in
development and investment finance. As we head towards the end of
the second quarter, we examine new developments in the real estate
sector.
Appetite to lend: what is the forecast for
2011?
A recent survey of banks operating in the UK commercial real estate
sector reported a marked increase of up to 50% in the amount of
debt available for UK commercial real estate finance. Whilst the
number of banks in this sector has decreased significantly since
2008, those banks that are still active are looking to increase
their lending during 2011. Interestingly, the banks surveyed
expressed a greater appetite to lend against new property, rather
than refinance existing stock, which may represent an early sign of
recovery in the real estate sector. However, whilst the desire to
lend is on the increase, many banks are unable to find the right
deals, in spite of the increased appetite of borrowers seeking
funding. Put simply, the lending criteria have shifted dramatically
in recent years: banks are increasingly looking not just to the
asset they are funding, but also to the types of borrower that they
wish to support.
Prime or secondary real estate?
Prime real estate is like gold dust, especially in
certain parts of Central London where demand remains high and
supply woefully low. Prime investments are often fought over by
cash buyers, sovereign wealth funds, insurance companies and
pension funds, many of whom are able to outbid the banks. Banks
have, instead, had to adapt to the market realities and have
shifted their attention to "quality" value-added and secondary real
estate. As a result of this shift, the secondary real estate sector
alone is up 30% on last year.
Development Finance - in or out?
Early signs suggest that a greater number of banks are prepared to
lend development finance in 2011, representing a market shift from
2010. That said, criteria remain every bit as stringent as last
year, with banks insisting on watertight pre-lets and pre-sales to
good quality third party operators. Speculative development is
unlikely to make a reappearance any time soon.
What sectors are the banks looking to lend
to?
There is no change here. Banks are still primarily interested in
lending to the relatively stable and traditional sectors of office,
retail, industrial and, increasingly, mixed use. Anything niche is
unlikely to have the same level of appeal unless the borrower
either has an established relationship with the bank in question or
is a key player in that particular niche.
Why has the cost of lending increased?
Regulatory changes and increased funding costs have had a negative
impact on the banks' ability to lend. This is likely to change the
landscape of UK real estate banking for the foreseeable future.
This has resulted in banks increasing their focus on reduced
loan-to-values and relationship borrowers. Margins have also
increased (typically now 2.0 to 2.5%) and are unlikely to shrink in
the immediate future.
Who else is on the horizon?
Whilst cash rich equity investors remain attracted to the stable
yields and capital investment opportunities that UK real estate
offers, the insurance sector may give them a run for their money in
the future. Insurers are under increasing pressure to improve
returns and the relatively stable yields from UK real estate are an
attractive proposition. It is likely that insurers will operate in
the high end market and will focus on the large portfolios that
banks may be unwilling or unable to finance. However, as banks have
the relationships and the teams to provide funding, the future of
real estate finance may include banks working alongside insurers
and cash rich equity investors. As new means of capital are
essential to keep our sector alive, this may lead to new
arrangements between banks and alternative debt sources in the
future.
Our real estate finance team would be delighted to assist you with
any of your funding requirements. We are widely panelled with the
region’s leading lenders and are at the forefront of market
developments.
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