Residential development lending falls as build-to-rent projects remain ‘difficult to finance’ – Cass

This formed the majority of the £8.8bn development finance lending completed during 2018, however lenders told Cass that private rental sector (PRS) projects, which totalled £1.7bn, were still difficult to finance.

In contrast, funding for commercial real estate soared by 12 per cent to hit £49.6bn despite the 13 per cent drop in property transactions worth £54bn over the same period.

Loan pricing was largely stable with some slight downward pressure for those secured by prime property and low loan to value (LTV) ratios.

However, retail property became the most expensive property type to finance due to credit concerns over the quality of retail income.

Pricing of loans secured by prime retail property increased to 233bps from 214bps over the twelve months to December 2018.

Potential overheating market

Cass Business School senior research fellow and report author Dr Nicole Lux said the industry had been watching the lead indicator of lending versus transactions carefully as it has previously marked significant turning points in the market.

“Debt supply usually lags borrower demand by one year and 2017 was a strong year for property transactions,” she said.

“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 per cent of turnover in 2018 compared to a ten-year average of 20 per cent.

“A relatively large amount of 26 per cent of new loans was distributed via loan syndication, showing market depth and breadth are widening,” she added.

Build-to-rent struggles

British Property Federation director of finance and commercial policy Ion Fletcher said: “The overall picture appears to be one of stability in the commercial property lending market, 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 these 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.”

Commercial Real Estate Finance Council Europe chief executive Peter Cosmetatos noted that the UK property lending market appeared to be stable and sober, without lenders taking on undue levels of risk.

However, he noted that the retail sector was facing significant difficulties.

“What is already clear, on the other hand, is the demise of retail property, which now accounts for just 15 per cent of the collateral for the debt covered by the report – it remains to be seen how investors and lenders can work their way through a very challenging situation,” he said.