Loan pricing was stable with some slight downward pressure for loans secured by prime property and low LTV ratios. Average five-year senior lending margins fell 7.4% – from 188 bps to 174 bps for loans secured against prime office property. Unsurprisingly, the secondary retail property sector saw the sharpest loan spike – up 17.2% to 334 bps in 2018 (2017: 285 bps).
“This leaves loans secured by retail property to be the most expensive property type to finance, due to credit concerns over the quality of retail income.” Cass wrote in a statement of the annual report.
Peter Cosmetatos, chief executive, CREFC Europe, said this year’s Cass report laid bare an evident headwind facing the commercial real estate sector, “is the demise of retail property, which now accounts for just 15% of the collateral for the debt covered by the report”.
He added: “It remains to be seen how investors and lenders can work their way through a very challenging situation.”
Loan pricing among prime retail property climbed by almost half compared to secondary assets – up 8.9% to 233 bps in 2018 (2017: 214 bps). Junior loan pricing also adjusted upwards – by 30-40 bps across property classes, offering yields of 9.2%.
The total weighted average default rate for secured CRE loans was 3.2% and write-down provisions were at 8% of the value of defaulted loan value in 2018. In comparison, on an annual basis the marginal default rate for project finance loans was 1.3%, 0.7% for RMBS securitised loans and 0.18% for BBB corporate loans. “This leaves secured CRE loans slightly more risky than other similar secured asset financing,” Cass explained.
Paul Coates, head of debt and structured finance, at CBRE, said:
“The [CRE lending] market in 2018 remained robust, despite continued political and economic uncertainty, with increased capital looking to deploy into the debt space. This in turn has created greater competition amongst lenders with borrowers seeing more favourable terms across many asset classes. However, how long this lasts remains to be seen.
“Conversely, where higher market and sectoral risks are evident, we are seeing lenders being more selective and setting wider pricing parameters, which can provide opportunities to achieve higher returns. This quality selection is key to robust underwriting but whether we are seeing the correct level of risk adjusted pricing in these sectors is as yet unclear.”
Ion Fletcher, director of finance and commercial policy at the British Property Federation, said:
“The overall picture appears to be one of stability… with the amount of new lending and average lending terms in line with recent years. However, it is surprising that despite the significant growth in the UK’s Build-to-Rent market over the last couple of years, lending against Build-to-Rent development projects seems to remain muted. Clearly, regulatory and commercial barriers remain that really need to be overcome to maximise the contribution of Build-to-Rent in addressing the UK’s housing shortfall.”