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Real estate finance down but not out

18 July 2012

Whilst market conditions remain tough, there are nevertheless some positive signs in the real estate finance market.

First the bad news:

  • it is apparent that there has been a reduction in real estate finance activity over the last year or so. The 2011 survey into the UK Commercial Property Lending Market carried out by De Montfort University revealed that the quantum of real estate finance was down by 6.8 compared to 2010
  • interest rate margins for investment finance rose over the same period to 3-3.5
  • the majority of lenders of investment finance are seeking loans of above £20 million, highlighting the difficulties in sourcing finance for investors / borrowers wanting smaller facilities
  • secondary property investors are also finding the market particularly challenging as lending into this part of the sector has declined from 2010-2011
  • this coupled with the introduction of slotting by the FSA, which has resulted in more capital having to be set aside than the Basel III regime requires, meaning that bank lending into the secondary sector has become more restrictive and expensive. (The slotting conditions require banks to allocate each loan to a risk category, with more capital having to be put aside as the loans default risk increases.)

…and now the good news:

  • prime property lending however is on the increase and...due to the quality of such assets slotting can lead to lower pricing for lending against them
  • further the De Montfort survey shows that there has been an increase of 8.6 in investment finance loan originations from 2010 to 2011
  • equity and mezzanine finance is becoming more readily available
  • the insurance and senior debt funders such as Allianz, Aviva, Morgan Stanley and Pramerica are becoming increasingly active in the sector. The insurers lent £3bn into this sector in 2011 which they find attractive considering the low returns otherwise available from shares, corporate bonds etc. Also the insurers capital regime is not as restrictive as the banks Basel III rules
  • there is a continued flight to quality as evidenced by the fact that the capital value of secondary properties decreased markedly over the last year or so whilst prime property values increased. But this can create favourable market opportunities for investors in the secondary market

The general consensus seems to be that 2012 will see the bottom of the real estate market...and so the only way is up?! And, despite challenging market conditions, there seems to be some optimism about investment opportunities in this sector.

Our real estate finance team are at the forefront of market developments and are well placed to assist you with any of your funding needs.

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