The UK property lending market is relatively stable as a result of pressure on interest cover ratios (ICRs) and debt yields, according to the 30th annual Financing Property report from international real estate consultancy Savills. real estate qatar
Despite the Bank of England's decision to increase interest rates for just the second time in a decade, lending market stability is causing some lenders to give lower leverage to borrowers as they refinance, resulting in opportunities for Middle Eastern investors.
Murray Strang, Head of Dubai at Cluttons Middle East, had this to say about the topic: "Regardless of a single recent rise in interest rates, financing rates and conditions in the UK are now more competitive than they have ever been, allowing Middle East investors to renegotiate terms of their current facilities or switch lenders with a variety of 'challenger banks' offering competitive terms and rates. Although unlikely, the only risk on the other hand is that interest rates will rise higher in the next six to a year, causing refinancing to be more cautious."
According to the CASS Lending Survey, which Savills sponsors, 73 percent of all outstanding debt is due for repayment over the next five years, with loan maturities expected to peak in 2020 due to the large amount of loans taken out in 2015. Some borrowers can seek alternative sources of financing as a result of this, particularly if values fall in the interim. With yields already poor, replicating current levels of leverage would be difficult if ICRs are to be sustained. This would eventually result in lower loan-to-value ratios (LTVs), which will cause some anxiety when refinancing.
Although many banks are unable or unwilling to raise LTVs due to regulatory constraints and prudence, 'alternative lenders' may be attracted to such borrowers as they seek to provide increased leverage at higher margins, according to Savills, though much will rely on the borrower's track record. The next three to four years could present enormous opportunities for alternative lenders, hastening the transfer of property debt from conventional banks to the alternative market, which Savills has described as having about 100 lenders. According to the study, the alternative sector accounted for approximately 5.0 percent of lending in 2008; by 2017, this had risen to 25%, and this is considered a conservative estimate.
Savills states in their theme 'Should lenders and investors be concerned about the rising cost of money?' that the underlying cost of money has risen over the past year in anticipation of a rise in the Bank of England Base Rate: the five-year SWAP rate has risen from 0.8 percent in May 2017 to approximately 1.3 percent - a rise of over 60% in a year - and three-month LIBO rate has risen from 0.8 percent in May 2017 to approximately 1.3 percent
In 2017, new origination levels were broadly stable at £44.5 billion, according to CASS. Refinancing accounted for 51% of overall origination, while new acquisitions accounted for 49%, meaning that lenders are replacing maturing loans with new lending but not dramatically expanding. Non-bank lenders raised origination by 21% in value terms in 2017, compared to just 3% for UK banks. Foreign banks, on the other hand, saw a 34 percent decrease in origination operation (excluding German and North American institutions), owing to increased competition and a lack of large core transactions.
Savills' Head of Valuation, Ian Malden, had this to say: "In comparison to a decade ago, the lending industry appears to be doing well. Low LTVs and high ICRs have resulted from regulation, prudence, and a healthy economy, and a diversified lending market has minimized the risk of 'contagion.' There is no space for complacency, but with the current amount of equity in the economy, a borrower would be less likely to be forced to hand over the keys to the lender if prices fall."
Nick Hume, a Director in Savills' valuations team, continues, "As long as the overall cost of financing remains low, as is currently anticipated, increasing interest rates will not trigger significant value changes or cause concern in the lending industry. In the face of pressure on ICRs and debt yields, however, some lenders could be compelled to give lower leverage, which may favor alternative lenders willing to take on more risk in exchange for higher returns. This is especially important when refinancing because a gradual decline in values can build pockets of stress, as is already evident in the retail sector."
According to Savills, the effect of increasing interest rates on the UK's commercial property markets is likely to be muted. On a macro stage, the beneficial impact of 45 million savers earning higher interest on their savings would offset the consequences of small mortgage rate increases. Due to lower LTVs and an increase in non-domestic investment into the UK, the relation between base rate increases and increases in property yields has weakened in the property investment sector over the last 20 years.
Savills' head of commercial analysis, Mat Oakley, says, "Finding asset classes that will produce rental growth over the next five years will be a challenge for investors. We expect logistics property to continue to be the star performer, with annual rent growth averaging 3%, but rents in the City have increased by 3.5 percent so far this year, and we expect a similar upward trend to be reflected in the undersupplied major regional markets. Although the news about retail remains bleak, we expect to see some upward rental development in strong locations that are well-suited to their catchment areas over the next five years."
Strang went on to say, "What does this mean for Middle East investors?" "While looking at developments in GCC-funded commercial property investment in the UK, we've seen a significant increase in demand over the last 3-5 years. This is due to the substantial emergence of regional cities outside of London offering attractive capital growth and strong rates of return to investors, along with challenging oil prices and currency fluctuations, and we expect this trend to continue."