Cass lending survey: liquidity trails demand in UK resi finance

New residential development finance fell £1bn in 2018 to £5.2bn, with borrowers seeking finance for PRS developments in particular citing difficulty in securing debt last year, according to Cass Business School’s UK Commercial Real Estate Lending Report, suggesting liquidity is trailing demand.

In 2018, £1.7bn in PRS development financing was extended. Overall, new development finance was £8.8bn last year.

Liquidity in UK broader real estate market, however, was described as “robust” and “stable and sober”. Overall, lending to UK commercial real estate (CRE) climbed 12% to £49.6bn in 2018, according to Cass Business School’s UK Commercial Real Estate Lending Report, against a 13% decline in UK property transactions to £54bn, according to CoStar data.

Dr Nicole Lux, report author from Cass Business School, said the industry had been watching the ratio of lending and transactions as a lead indicator of potential significant turning points in the market.

Dr Nicole Lux explains:

“Debt supply usually lags borrower demand by one year and 2017 was a strong year for property transactions,” explained Dr Lux. “It remains to be seen if the debt market was just catching up in 2018. Historically a relationship of 1:1 could easily lead to an overheating market and 2019 needs to be carefully monitored.

“This is also confirmed by an increasing share of new loan origination against outstanding loan books, which reached 29% of turnover in 2018 compared to a ten-year average of 20%.  A relatively large amount of 26% of new loans was distributed via loan syndication, showing market depth and breadth are widening.”

The total amount of outstanding loans increased in 2018, but the overall loan book – as captured by Cass Business School’s UK real estate lending survey – fell by -1.9%, as reduced their undrawn amounts, which Cass said indicated fewer outstanding development loans. Excluding undrawn commitments, the total loan book increased 5% to £173bn.

Peter Cosmetatos, Chief Executive, CREFC Europe, explains:

“The headline seems to be that the UK property lending market is stable and sober, providing the credit the UK market needs without lenders taking on undue levels of risk.  If there is to be any serious Brexit impact on this market, it certainly hasn’t emerged yet.”

Lenders were characterised as acting in a “responsible and disciplined” manner – an array of calming adjectives in the context of one of 2019’s ubiquitous themes that the market has entered “late-stage cycle” territory.

Neil Odom-Haslett, president of the Association of Property Lenders, explains:

“The survey clearly demonstrates that the lending community is managing its commercial real estate lending books in a responsible and disciplined fashion and that the capital regulations imposed on lenders by the authorities following the global financial crisis, are actually working.  The peaks and troughs of the lending market, with the peaks usually at the wrong end of real estate cycles, are hopefully in the past and history will not repeat itself (well, not during this cycle at least!).  In this respect ‘benign’ is good.”

james.wallace@realassetmedia.com