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Cass Lending Report: prime lending margins continued to come under pressure in H1

Outstanding development finance stood still, but undrawn facilities increased to £27bn during the first six months in 2019 from £22bn at year-end 2018. This indicates a further amount of development finance is available for drawdown later this year.

Pricing of loans remains extremely competitive for prime London office properties ranging from 140 – 200bps within the 25th and 75th percentile. Pricing for loans against secondary properties and locations remains 80- 100bps wider than prime, especially loan pricing against secondary retail property remains above those of other asset classes reaching 330 – 600bps for relatively low LTV’s 45 – 55 per cent.

On an annual return basis, a five-year fixed rate CRE senior secured loan generated a return of 2.9 per cent compared to a five-year gilt with a return of 0.5 per cent and UK corporate investment bonds at 1.4 – 1.7 per cent in June 2019, which makes it still one of the most attractive investments in the current market. However, some lenders are experiencing pressure on loan performance on loans against secondary retail assets, and correct risk pricing is crucial.

Neil Odom-Haslett, President of the Association of Property Lenders said:

“The first six months of 2019 have been challenging due to a number of reasons, notably, the lack of transactions, the structural changes to the retail sector, the uncertainty that Brexit has bought and many lenders being in “risk-off” mode.  Notwithstanding these head winds, real estate lenders have had an incredibly busy first half as they refinance their legacy loan books and reposition some of their retail lending. 

“There has been strong competition at the prime end of the lending market, particularly in central London, with financing opportunities been aggressively priced by some lenders, while at the other end of the spectrum, lending against secondary shopping centres, has proved a bit more tricky and margins have widened.”

Ion Fletcher, Director of Policy (Finance) at the British Property Federation said:

“The bulk of commercial property lending continues to be to assets in London and the south east, reflecting the region’s dynamism versus the rest of the country, but perhaps also reinforcing disparities in economic and social outcomes. To get lending flowing across the country, the government must prioritise extensive investment in physical, digital and skills infrastructure to increase productivity.”

james.wallace@realassetmedia.com