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Research findings of the survey into THE UK COMMERCIAL PROPERTY
LENDING MARKET 2016
De Montfort University
Nicole Lux
• Trends in value of outstanding debt • Loan originations • Structure of outstanding loan books • Loan terms • Conclusions and Issues
TOTAL MARKET DEBT YE 2016
Source: De Montfort
131.5 127.6
25.4 24.2
11.5 13.1 19.9 26.8 23.5 17.1
22.1 26.6
-
50.0
100.0
150.0
200.0
250.0
2015 2016
Undrawn loan amountsCMBSAnnual accountsOther Non-bank LenderInsurance CompaniesAll Banks
Total £233.9bn £235.3bn
Less undrawn: £211.7bn (2015) To £208.7bn (2016) Decline 1.5%
DMU TOTAL DEBT YE 2016
Source: De Montfort
Totaloutstandingloans 2016
Senior Junior &Mezzanine
Undrawnamounts
Total booksize 2016
All Lenders 164,849 161,450 3,400 26,617 191,466Other Non-bank Lenders 13,122 10,541 2,581 1,455 14,578Insurance Companies 24,169 23,596 574 808 24,978All Banks 127,558 127,313 245 24,354 151,911
- 20,000 40,000 60,000 80,000
100,000 120,000 140,000 160,000 180,000 200,000
ORIGINATION VOLUME BY LENDER 2016
Source: De Montfort
68.3
81.5 83.9
49.8
15.1 20.6
27.5 25.4 29.9
45.2
53.7
44.5
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
UK Banks & Building Societies German BanksOther Int Banks N. American BanksInsurance Companies Other Non-bank Lenders
TOTAL ORIGINATION BY LENDER
Source: De Montfort
Total £44.5bn £53.7bn
47% 34%
13%
13%
13%
14%
8% 14%
10% 16%
10% 9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Total Origination 2016 Origination 2015
Other Non-bank Lenders
Insurance Companies
North American Banks
Other International Banks
German Banks
UK Banks & BuildingSocieties
TYPE OF ORIGINATION BY PROJECT
Source: De Montfort
83% 84% 77%
4% 4% 5%
13% 11% 13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
YE 2014 YE 2015 YE 2016
Investment Commercial Development Residential Development Other
TYPE OF ORIGINATION BY PROJECT
Source: De Montfort
69% 88% 83%
91% 95%
66%
5%
9% 5%
5% 1%
9%
20%
3% 10%
4% 0% 24%
7% 0% 2% 0% 4% 1%
0%10%20%30%40%50%60%70%80%90%
100%
UK Banks &BS
GermanBanks
OtherInternational
Banks
NorthAmerican
Banks
InsuranceCompanies
Other Non-bank Lenders
Investment Commercial Development Residential Development Other
TOTAL SYNDICATION & PARTICIPATIONS
Source: De Montfort
- 2,000 4,000 6,000 8,000
10,000 12,000 14,000 16,000 18,000 20,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
UK Banks and Building Societies German BanksOther Int Banks North American BanksInsurance Companies Non Bank Lenders
WILLINGNESS TO LEND AT DIFFERENT TICKET SIZES (INVESTMENT)
39
46
50
39
30
18
5
7
8
10
8
3
26
17
12
21
32
49
0% 20% 40% 60% 80% 100%
above 100
>50 - 100m
>20 - 50m
>10 - 20m
>5 - 10m
<£5m
yesmaybeno
Source: De Montfort
WILLINGNESS TO LEND AT DIFFERENT TICKET SIZES (DEVELOPMENT)
Source: De Montfort
22
25
22
19
14
14
6
4
7
8
8
2
42
41
41
43
48
54
0% 20% 40% 60% 80% 100%
above 100
>50 - 100m
>20 - 50m
>10 - 20m
>5 - 10m
<£5m
yesmaybeno
OTHER NON BANK LENDERS: TICKET SIZES (INVESTMENT)
Source: De Montfort
9
11
16
15
11
3
2
3
1
2
3
3
11
8
5
5
8
16
0% 20% 40% 60% 80% 100%
above 100
>50 - 100m
>20 - 50m
>10 - 20m
>5 - 10m
<£5m
yesmaybeno
OTHER NON BANK LENDERS: TICKET SIZES (DEVELOPMENT)
Source: De Montfort
7
8
9
9
5
3
2
1
3
3
4
2
13
13
10
10
13
17
0% 20% 40% 60% 80% 100%
above 100
>50 - 100m
>20 - 50m
>10 - 20m
>5 - 10m
<£5m
yesmaybeno
AVERAGE LOAN SIZE ORIGINATED
Source: De Montfort
£m Max Average Min
UK Banks and BS 88 17 3
German Banks 144 68 28
Other International Banks 83 33 16
North American Banks 321 164 51
Insurance Companies 122 56 14
Other non-bank Lenders 61 28 14
All Lenders 108 46 17
• Trends in value of outstanding debt • Loan originations • Structure of outstanding loan books • Loan terms • Conclusions and Issues
BANKS’ BOOKS CONTRACT Y-O-Y IN 2016
Source: De Montfort
31.2% 33.7%
16.6%
27.6%
13.9% 16.2% 13.2%
18.5%
10.5%
-0.7%
-9.9% -6.0%
-7.7% -8.8%
-8.5%
1.9% -2.1%
0
50
100
150
200
250
300
-15%-10%-5%0%5%
10%15%20%25%30%35%40%
Aggregated loan book size £bn (RHS) % change in book sizes (LHS)
UK BANKS & BS STABILISE MARKET SHARE
Source: De Montfort
72% 69% 68% 66% 66% 68% 66% 57% 55% 50% 45% 46% 47%
10% 11% 9% 10% 10% 11% 12% 13% 10%
10% 11% 11% 11%
16% 18% 21% 22% 23% 20% 20% 20%
19% 16% 16% 13% 15%
2% 2% 2% 2% 1% 1% 1% 1%
2% 5% 6% 7% 5%
0% 0% 0% 0% 0% 0% 0% 8% 10% 13% 15% 15% 15%
1% 4% 6% 7% 8% 8%
0%10%20%30%40%50%60%70%80%90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 MY2016
YE2016
UK Lenders and Building Societies German LendersOther International Lenders North American LendersInsurance Companies Other Non-bank Lenders
LOAN-TO-VALUE EXPOSURE BY LENDER
Source: De Montfort
23% 32% 37% 37% 36%
40%
45% 50% 52% 53%
11%
10%
6% 5% 7%
7%
5% 2% 1% 1%
7%
3% 2% 2% 2%
12% 5%
3% 2% 2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 MY 2016 YE 2016
>120%100% - <120%85% - <100%70% - < 85%50% - <70%<50%
Only 3% of loans are above 100% LTV at YE 2016 (4% at YE 2015)
LOAN-TO-VALUE EXPOSURE BY LENDER
Source: De Montfort
39% 24%
39% 40% 40%
14%
49% 74% 42% 58% 54%
63%
6% 2%
8%
2% 4% 21%
2% 0% 4% 0% 0% 0%
0%10%20%30%40%50%60%70%80%90%
100%
>120% LTV100% - <120% LTV85% - <100% LTV70% - < 85% LTV50% - <70% LTV<50% LTV
MATURITY PROFILE OF LOAN BOOKS
Source: De Montfort
18.5
14.4
20.2
22.7
19.0
15.9 17.0
0.0
5.0
10.0
15.0
20.0
25.0
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1yr 2yr 3yr 4yr 5yr >5yr >10yr
2014 2015 2016 Total volume (£bn, RHS)
TOTAL LOAN BOOK VALUE - DEVELOPMENT
Source: De Montfort
0
5
10
15
20
25
30
35
40
45
50
Total of loan book allocated tocommercial speculative and partpre-let developmentTotal of loan book allocated toresidential development for sale
Total of loan book allocated tofully pre-let commercial
Total development finance increased to £20.2bn in 2016 from £16.2bn in 2015 on loan books
REGIONAL EXPOSURE OVER TIME
Source: De Montfort
30% 28% 25% 27% 27% 26% 30% 30% 34% 39% 44% 48%
23% 20%
19% 25%
18% 18% 17% 18% 15% 15%
14% 15%
15% 17%
16% 13%
14% 17% 15% 16% 14% 14% 11%
11% 15%
16% 17%
14% 14% 16% 17% 17% 15%
14% 12% 12%
7% 8% 8% 7%
6% 6% 5%
6% 6%
5% 5% 4%
9% 12% 15% 14% 21% 17% 18% 13% 17% 13% 15% 10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
OtherScotlandNorthMidlands&WalesSouth EastCentral London
Central London share rising
LENDER BY REGIONAL EXPOSURE
Source: De Montfort
39%
67% 62% 45% 50% 45%
13%
12% 13%
16% 14% 29% 13%
9% 9%
11% 11% 11%
17%
5% 9%
8% 9% 6% 5%
5% 4% 7% 2%
2% 12% 2% 3%
13% 13% 6%
0%10%20%30%40%50%60%70%80%90%
100%
OtherScotlandNorthMidlands/WalesRest of SECentral London
PROPERTY TYPE EXPOSURE OVER TIME
Source: De Montfort
29% 28% 26% 23% 23% 21% 22% 21% 22% 22% 20% 21%
24% 27% 28% 25% 23% 23% 24% 26% 23% 23% 26% 29%
16% 13% 21% 20%
17% 19% 17% 16% 16% 17% 13% 16%
11% 10% 10%
10% 10% 10% 11% 11%
8% 9% 9% 9%
3% 6% 6%
6% 5% 5% 5% 4%
4% 5% 6% 8%
10% 6% 5%
7% 8% 8% 9% 9%
10% 10% 9%
0%
7% 11% 6% 9% 13% 14% 13% 13% 18% 15% 17% 17%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
OtherSocial HousingLeisureIndustrialResidentialOfficesRetail
• Trends in value of outstanding debt • Loan originations • Structure of outstanding loan books • Loan terms • Conclusions and Issues
UK LOAN MARGINS MOVED UP DURING 2016
Source: De Montfort University
Average margin for Prime Office Loan at 65% LTV
0
50
100
150
200
250
300
350
400
450
2011 2012 2013 2014 2015 2016
UK Banks & BSGerman BanksUS BanksOther International BanksInsurance Companies
LOAN MARGINS FOR PRIME OFFICE
Source: De Montfort
Year Senior Debt Junior Debt Mezzanine
Max LTV% Margin
bps Max LTV% Margin bps Max LTV% Margin bps
2008 55 170 60 250 70 400
2009 65 224 72.5 620 79 850
2010 68 209 75 350 80 738
2011 64 350 78 1,050 75 1,000
2012 65 331 70 550 77.5 775
2013 66 267 73 613 81 750
2014 64 173 74 506 84 800
2015 64 183 70 418 80 670
MY 2016 60 185 74 563 80 800
YE 2016 59 198 73 589 79 758
LOAN MARGINS BY PROPERTY TYPE
Source: De Montfort
Senior margins (bps) Margin
(average) 65% LTV Arrangement fee (average) Average LTV
Prime office 198 223 89 59%
Prime retail 207 240 92 57%
Prime Industrial 224 255 94 57%
Secondary office 263 270 106 57%
Secondary retail 270 281 106 58%
Secondary industrial 291 349 109 57%
Residential investment 223 223 95 58%
Hotel 264 220 102 57%
Student Housing 237 233 99 57%
HISTORIC MARGINS BY PROPERTY TYPE
Source: De Montfort
0
50
100
150
200
250
300
350
400
450
Prime OfficePrime RetailPrime IndustrialSecondary OfficeSecondary RetailSecondary IndustrialResidential Investment
LOAN MARGIN FOR DEVELOPMENT
Source: De Montfort
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015 2016
Fully Pre-let OfficeDevelopment
50% Pre-let : 50%Speculative OfficeDevelopmentSpeculative OfficeDevelopment
Resi development
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00Ja
n-12
Mar
-12
May
-12
Jul-1
2S
ep-1
2N
ov-1
2Ja
n-13
Mar
-13
May
-13
Jul-1
3S
ep-1
3N
ov-1
3Ja
n-14
Mar
-14
May
-14
Jul-1
4S
ep-1
4N
ov-1
4Ja
n-15
Mar
-15
May
-15
Jul-1
5S
ep-1
5N
ov-1
5Ja
n-16
Mar
-16
May
-16
Jul-1
6S
ep-1
6N
ov-1
6Ja
n-17
West End (property yield) Greater London (property yield)Banks' mortgage interest received (floating) Borrower's total lending cost (fixed)
REAL ESTATE LENDING & RELATIVE VALUE
BORROWER COST OF DEBT
Source: De Montfort
Asset Value V Assumption 100 100 100 100 100
Net Income Return IR Assumption 3.5% 3.5% 3.5% 3.5% 3.5%
Interest Rate rD Margin + swap 3.0% 4.0% 5.0% 6.0% 7.0%
DSCR Covenant 1.20 1.20 1.25 1.30 1.35
LTV Debt 60.00 60.00 60.00 60.00 60.00
ICR/DSCR 1.94 1.46 1.17 0.97 0.83
• Trends in value of outstanding debt • Loan originations • Structure of outstanding loan books • Loan terms • Conclusions and Issues
KEY CONCLUSIONS • Origination volume was down 17% from previous peak in 2015, but
UK Banks & BS Increased volume of origination, regaining market share, but more refinancing than acquisition
• Extended property cycle due to low interest rests and support of the general economy and keep loan margins low, despite Increase in 2016, but narrowing of prime versus secondary
• Current LTV lending is conservative, 55% - 60% LTV, but property yields are ultra low: What is going to happen when the 60% LTV loan becomes 80% LTV when yields rise? What about mezzanine positions?
• Increasing specialisation of lenders, such as Insurance Companies and Other NBL
• ICRs under pressure despite low interest rates due to low yielding properties – should debt yield be a more important measure to size debt?
MANY THANKS TO ALL OUR PARTICIPANTS Aalto Invest LLP Cornerstone Real Estate Advisers Europe LLP Metropolitan Life Insurance Company Aareal Bank AG Coutts and Company Morgan Stanley Aeriance Investments S.A.R.L Credit Agricole Corporate & Investment Bank Münchener Hypo Bank EG AgFe DB Realisations Building Society N M Rothschild and sons AIG Asset Management (Europe) Limited DekaBank Nationwide Building Society Allied Irish Bank (GB) Deutsche Bank AG Newcastle Building Society Aldermore Deutsche Hypothekenbank AG Och Ziff Capital Management Aviva Investors Real Estate Finance DG Hyp Oversea-Chinese Banking Corporation Limited Axa Real Estate DRC Capital LLP Pacific Life Bank of America Merrill Lynch Dunbar Bank plc Partners Group (UK) Ltd Bank of Ireland Group Europa Capital Mezzanine Ltd Partnership Life Assurance Company Barclays GAM International Management Limited pbb Deutsche Pfandbriefbank Bayern LB London Branch GreenOak Real Estate Pluto Finance Berlin Hyp AG Helaba Landesbank Hessen-Thüringen Pramerica Real Estate Investors (Europe)
Blackstone Real Estate Debt Strategies HSBC Bank plc Pricoa Mortgage Capital (incl Friends Provident)
BNP Paribas ICG-Longbow Principality Building Society Bristol & West Property Finance ING Real Estate Santander Corporate & Commercial Banking Cain Hoy Enterprises (UK) Limited Investec Bank (UK) Ltd Standard Life Insurance Cambridge and Counties Bank J P Morgan Securities Starwood Capital Europe Advisers LLP Canada Life Ltd Laxfield Capital Société Generale Chenavari Investment Managers Landesbank Baden-Wüerttemberg Sumitomo Mitsui Trust Bank Limited Cheyne Capital Management (UK) LLP LaSalle Investment Management TH Real Estate Citi Group Leeds Building Society The Royal Bank of Scotland Close Brothers Property Finance Legal & General UBS Asset Management Contour Capital Lloyds Banking Group Urban Exposure Limited
M & G Investment Management Ltd Wells Fargo Bank International West Bromwich Commercial Ltd
MANY THANKS TO OUR SUPPORTERS
At year-end 2016, data was received from a total of 77 lending teams operating out of 76 lending organisations. The lending teams comprised of 43 Banks and Building Societies, 12 Insurance Companies and 22 Other Non-bank Lenders.
News about the survey, new analysis available and presentation dates can be found under http://cplr.org.uk
The authors gratefully acknowledge the generous financial support provided by Allen & Overy, Association of Property Lenders, the Bank of England, Bilfinger GVA, British Property Federation, Canada Life Ltd, Capita Asset Services, Commercial Real Estate Finance Council Europe, Fitch Ratings, GIC Real Estate, Helaba, Jones Lang LaSalle Corporate Finance Limited, Kingfisher Property Finance Limited, Savills and The Royal Bank of Scotland
Chair: Marc Mogull – Managing Partner, Benson Elliot Capital Management and Senior Fellow, Land Economy, Cambridge University and Chairman, Bank of England Commercial Property Forum • Amy Aznar – Head of Debt and Special Situations, LaSalle Investment
Management
• Paul Coates – Managing Director, UK Real Estate Finance, The Royal Bank of Scotland
• Emma Huepfl – Co-Principal, Laxfield Capital
• Michael Kenney – Managing Director, Head of UK Clients, pbb Deutsche Pfandbriefbank
• Cameron Spry – Senior Partner and Head of Investments, Tristan Capital Partners
THE PANEL