market trend analysis - linkassetservices.com key findings welcome to the third issue of the market...

Market TrendAnalysisIssue 3 | March 2019

Key Findings

Welcome to the third issue of the Market Trend Analysis from Link Asset Services.

This year we analyse the visible market trends through our datasets across the last three years and assess market prospects for 2019 as a whole. As with our last report, we focus on lender sentiment, appetite, intentions and projections for the year ahead.

Many thanks to all of our respondents.

There is caution amongst lenders

As they consider prospects for 2019, noticeably fewer are expecting to grow

than in previous years. Amortisation is also the subject of renewed focus.

Asset values are expected to fall in both commercial and residential

markets

Commercial values are expected to be under the most pressure during 2019.

Bridge loans become cheaper

This is perhaps owing to the short durations which can provide greater asset

liquidity in an uncertain market.

Lenders are looking for bigger tickets

Some of the best loan pricing is only available on significant transactions.

Many lenders are retrenching into

core markets and products.

Most selected fewer geographic areas and

fewer asset sectors as a preference.

The provision of longer term debt continues

to grow

Supply is perhaps still outweighing demand for

very long term loans.James Wright Head of Real Estate Financet: +44 (0)207 954 9619e: [email protected]

Natalie KingCoordinatort: +44 (0) 207 204 7940e: [email protected]

Abbie Ward-CorderoyAnalyst t: +44 (0)207 397 6292e: [email protected]

Contents

Key Findings 3

Market Sentiment 4

Leverage & Pricing – Investment Loans 6

Leverage & Pricing – Development Loans 9

Availability – Sector & Geography 11

Loan Maturity & Ticket Size 12

About us 14

Link Asset Services | Market Trend Analysis • 2 Link Asset Services | Market Trend Analysis • 3

mailto:[email protected]

Three quarters of all respondents

believe commercial property prices will

decline by more than 2.5% in 2019.

Market Sentiment

The number of lenders expecting their origination teams and loan volumes to grow in the year ahead fell quite noticeably, by -10% and -18% respectively. This is significant as the data had previously been consistent showing just a 1% variance in both from 2017 to 2018.

Although not as strong as 2017, it is recognised that 2018 was another good year for transactional volume; this supported very strong debt origination. Lenders are clearly less confident about their prospects in 2019 but still see upside possibilities on origination volume. This is broadly in line with market consensus which indicates a soft landing despite the continuing risk of a no-deal Brexit.

There is a very strong consensus for the UK Base Rate and UK Treasury Gilts to remain stable during the year. Most respondents had forecast an increase in last year’s survey and that was realised in the latter part of 2018, although Gilt rates have since declined. This year’s predictions are in line with market forecasts.

Leverage and pricing are expected to remain similar for the next 12 months with most risk highlighted on the downside to LTVs. Despite the market risks, transactions are taking no longer to complete than they were a year ago, still averaging 52 days from agreeing terms to drawdown of funds.

75%

61%

0%

40%

8%

3%

10%

0%

22%

34%

74%

59%

70%

81%

37%

57%

3%

5%

26%

2%

22%

16%

54%

43%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

UK Commercial Property Values

UK Residential Property Values

Pricing on New Loans (Margin & Fees)

LTV on New Loans

UK Treasury Gilts

UK Base Rate

New Loan Originations

Size of Team

Decrease Remain similar Increase

Notably, the vast majority of respondents are now forecasting a decline of more than 2.5% in both residential and commercial property prices in the year ahead. Interestingly, commercial prices are anticipated to be under greater pressure than residential prices in 2019 which is a reverse on last year’s forecasts. Three quarters of all respondents believe commercial property prices will decline by more than 2.5% in 2019.

Unsurprisingly, Brexit has dominated respondents’ market fears, with 51% of respondents considering it the greatest risk in the year ahead. A whopping 74% highlighted UK political dangers with the top three answers being Brexit (51%), a change of Government (14%) and general political uncertainty (9%).

Respondent Expectations

What is the biggest risk to the CRE market in the coming year?

Brexit

A Change of Government

Occupational Market Weakness

International Trade Disputes

Credit Market Shock Residential Crash

General Political Risk Technological Disruption

UK Recession

51%

14%

9%

8%

5%

5%

5%2% 1%

Link Asset Services | Market Trend Analysis • 5Link Asset Services | Market Trend Analysis • 4

Leverage & Pricing – Investment Loans

Last year, two thirds of respondents expected LTVs to remain stable in the UK market. Heading into 2019, we’ve seen average maximum LTV across all loan types drop by a modest 2% from 2018 data to 69%.

Alternative Lenders offer the highest average maximum leverage at 80%, up from 76% last year, taking over from Debt Funds, whose leverage has declined to 77% from 83%.

Pension Funds maximum leverage fell by 17% to 60% LTV, the largest decline ever recorded. Some Pension Funds do not have specific real estate debt origination functions, but rather bundle all ‘alternative investments’ into a single origination unit. Several have taken a step back on real estate lending and are investing into other alternatives which are seen to offer a better risk-reward balance at present. It will be interesting to see if this trend continues as the government seeks to increase options for illiquid asset investment.

0%

20%

40%

60%

80%

100%

Alternative Lender

Asian Bank

Pfandbrief Bank

Debt Fund Peer to Peer

Lender

UK Bank NorthAmerican

Bank

Hedge Fund

Insurance Company

European Bank

MiddleEastern

Bank

PensionFund

Ave

rage

Lev

erag

e (%

)

Senior Loans Whole Loans Mezzanine Loans Preferred Equity Bridge Loans

European Banks are increasingly competitive, pricing Senior Loans at an average margin of 175bps alongside Pfandbrief Banks. However, on average, Pfandbrief Banks will still provide the lowest cost overall as their average arrangement fee is 63bps compared to 75bps for European Banks. Pension Funds, at 200bps, and Insurance Companies, at 204bps, are also offering very competitive senior pricing.

The cheapest Mezzanine Debt is available from North American Banks who also offer the best priced Whole Loans and Bridge Loans. However, you’ll need a large ticket to attract that pricing as their average minimum ticket size is £82.5m.

Average Maximum LTV by Lender Type

Average Maximum LTV Year on YearAverage Margin by Loan Type Year on Year

Average Margin by Lender Type

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60%

80%

100%

LTV (%) 2019 LTV (%) 2018 Average 2019 Average 2018 2019 2018 2017

0

500

1000

1500

2000

Senior Loans Whole Loans MezzanineLoans

BridgeLoans

PreferredEquity

Ave

rage

Mar

gin

(bp

s)

Alternative Lender

Asian Bank

Pfandbrief bank

Debt FundPeer to Peer

Lender


Bank

Hedge Fund

Insurance Company

European Bank

MiddleEastern

Bank

Pensionfund

Senior Loans Whole Loans Mezzanine Loans Preferred Equity Bridge Loans

0

200

400

600

800

1000

1200

1400

1600

Ave

rage

Mar

gin

(bp

s)

Mezzanine leverage has fallen slightly, being limited to an average of 80% LTV with some providers stretching as high as 85-90% before entering preferred equity territory.

Last year, we noted that pricing had started to rise in the higher risk categories of lending. This year, that trend continues as average Mezzanine Loan margins have risen by 61bps to stand at over 1000bps in 2019. Senior and whole loan margins have both continued to decline.

Interestingly Bridge Loans have become significantly cheaper this year, with margins declining 275bps to now stand below 750bps as an average. This certainly correlates with Link’s experience in the market. Lenders have increasingly come to view the short term nature of these loan assets as a liquidity benefit in an uncertain market.


Leverage & Pricing – Development Loans

Alternative Lenders offer the highest leverage for development finance in 2019, leading the way on both maximum LTC (87%) and LTGDV (71%). However, that comes at a price as average development margins for this category are over 1100bps.

0%

10%

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60%

70%

80%

90%

100%

Ave

rage

Lev

erag

e (%

)

LTC (%) 2019 LTC (%) 2018LTGDV (%) 2019 LTGDV (%) 2018

Alternative Lender

Asian Bank

Pfandbrief Bank

Debt FundPeer to Peer

Lender


Bank

Hedge Fund

Insurance Company

European Bank

MiddleEastern

Bank

Average Maximum LTV by Lender Type

The lowest cost development finance is provided by different lenders depending upon the type of project being financed. As with last year, we have examined the best financing options for development projects under the given assumptions including margin, arrangement, exit and non-utilisation fees.

Despite offering limited leverage, European Banks provide the lowest cost development finance across all types of commercial scheme as well as Residential Development for Hold & Rent. Middle Eastern Banks offer the cheapest financing for Residential Development for Sale and UK Banks are the best priced of lenders which consider Land Loans both with and without planning.

Project type Cheapest overall finance cost*

Commercial Development Part Pre-let European Banks

Commercial Development 100% Pre-let European Banks

Commercial Development Speculative European Banks

Residential Development for Sale Middle Eastern Banks

Residential Development for Hold & Rent European Banks

Land Loans with Planning UK Banks

Land Loans without Planning UK Banks

* Based on a 2 year development at average LTC for the relevant debt type and run on a standard S-Curve schedule with full repayment at PC

Income Covenants Year on Year

120

125

130

135

140

145

150

155

160

165

170

2017 2018 2019

Average ICR (%) Average DSCR (%)

ICR covenants continued their downward trend this year with lenders requiring lower interest cover. However, unusually, we saw DSCR covenants tick upwards, meaning a convergence of ICR and DSCR. We had not expected to see a decoupling of these indicators, which may suggest a greater focus on amortisation of debt during loan terms. This new trend is certainly one to keep an eye on.

Pension Funds maximum leverage fell by 17% to 60% LTV, the largest decline ever recorded.

‘Relative Value’ by Lender Types – Investment Loans

40%

50%

60%

70%

80%

90%

100 300 500 700 900 1100

Ave

rage

Max

imum

LTV

(%)

Average Margin (bps)

UK Bank Pfandbrief Bank European Bank Peer to Peer lender

Linear (all)

Asian Bank Middle Eastern Bank North American Bank

Insurance Company Debt Fund Hedge Fund

Alternative lender

Pension Fund

When we average data within each lender category, we can assess their “relative value” based on maximum leverage offered against margin pricing. The lender categories above the line are relatively “good value”, offering higher maximum leverage for lower average margins when compared to those below the trend line.


For our ‘relative value’ chart in development loans we have used what we consider to be the most important indicators of leverage and pricing; average maximum LTC and average margin. The best ‘relative value’ in development loans is offered by Hedge Funds who dropped pricing significantly from 952bps to 590bps but kept leverage relatively unchanged at 80% LTC versus 81% LTC in 2018.

Interestingly, we have two lender categories which have ceased development lending; North American Banks and Pfandbrief Banks. We believe this is driven by the cautious approach of both in the short term

to UK market. For North American Banks this is because they are primarily operating an ‘originate to distribute’ lending model which has been impacted by the weakness in UK securitisation and syndication markets in the run up to Brexit. For Pfandbrief Banks the caution around the UK is primarily legislative as there is some uncertainty as to if and how UK loans can be eligible for Pfandbrief post-Brexit. In contrast, Insurance Companies broadened their lending scope to include Development Loans for this year. For now, they offer poor ‘relative value’ overall but we will see how this lender category matures into development lending in the future.

40%

50%

60%

70%

80%

90%

100%

100 300 500 700 900 1100 1300

Ave

rage

LTC

(%)

Average Margin (bps)

Hedge Fund Peer to Peer Lender Debt Fund Alternative Lender UK Bank

Middle Eastern Bank European Bank Insurance Company Asian Bank

‘Relative Value’ by Lender Type – Development Loans

This chart shows the proportion of responding lenders who can fund various Development Loan types. Land without planning remains difficult to finance and speculative commercial development has become significantly more challenging to find lenders for.

Availability: Development Loan Types

Availability – Sector & Geography

This year, the UK’s most popular regions; London, the South East and South West; were notable fallers amongst lenders’ preferences. The Midlands moves ahead of the South West to be a clear third in the UK. Scotland was the biggest riser in terms of lender preference in 2019.

Notably, we have seen a decline in preference across all sectors; it appears lenders are retrenching to their core market segments. This might be a further sign of caution.

Industrial/logistics moved up to second place behind office perhaps explaining, in part, the Midlands similar rise in lender appetite. The retail sector had shown one of the largest declines in preference last year but in 2019 it is the clear loser amongst all sectors as it falls from second to fourth.

Sector preference Year on Year

Scotland 70% - 79%

North 80% - 89%

Midlands 90% - 94%

South East 90% - 94%

London 95% - 100%

Wales 70% - 79%

South West 80% - 89%

Northern Ireland <50%

BUY: Industrial / Logistics

HOLD: Hotel & Student Housing

SELL: Retail

UK Bank 78% 64% 21% 7% 21% 7%

Pfandbrief Bank

European Bank 50% 50% 50% 25%

Asian Bank 25% 25%

Insurance Company 14% 14% 14% 14% 28% 14% 14%

Debt Fund 47% 47% 47% 47% 35% 47% 35%

Peer to Peer Lender 83% 50% 16% 50% 33%

Hedge Fund 50% 33% 33% 33% 33%

North American Bank

Alternative Lender 76% 38% 38% 38% 46% 53% 38%

Pension Fund

Middle Eastern Bank 50% 50% 50% 50%

– No lending appetite

Residential Dev for sale

Residential Dev for Hold

& Rent

Commercial Dev 100%

Pre-let

Commercial Dev Part Pre-let

Commercial Dev

Speculative

Land Finance with planning

Land Finance without planning

2019 2018 2017

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Pro

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50%

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Investment Loans Development Loans


0

100m

200m

300m

400m

500m

500m+

UK Banks EuropeanBanks

AsianBanks

MiddleEasternBanks

Insurance Company

DebtFunds

HedgeFunds

AlternativeLenders

Peer to PeerLenders

175

4040

88100

33 35

150

263

Individual responseMedian Range

Loan Maturity & Ticket Size

Maximum loan amount has increased exponentially for investment loans from an average of £134m in 2017, to £154m in 2018 and up to £226m in 2019. There are now five lender categories which can lend a maximum of £500m or more on investment loans.

Average Maximum Ticket Size

Maximum Investment Loan Ticket Size by Lender Category

Maximum Development Loan Ticket Size by Lender Category

Loan Maturity - Investment loans

For investment loans, we have seen a clear increase in preference for longer term debt, particularly 10 years+. More lenders than ever are offering loans of 10 years+ with a steady increase since 2017. 3-5 year loans remain the most keenly supplied type of funding.

Investment Development

-

50

100

150

200

250

2017 2018 2019

0

100m

200m

300m

400m

500m

500m+

45

175 175

350

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100 100100

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UK Banks PfandbriefBanks

EuropeanBanks

AsianBanks

MiddleEasternBanks

Insurance Company

DebtFunds

HedgeFunds

PensionFunds

NorthAmerican

Banks

AlternativeLenders

Peer to PeerLenders

Individual responseMedian Range

2019 2018 2017

0%

10%

20%

30%

40%

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60%

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0-2 Years 3-5 Years 6-7 Years 8-10 Years 10+ Years

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About us

About us

The Real Estate Finance division of Link Asset Services can source, secure and structure finance for investors and developers. Connected with almost every major real estate lending institution active in Europe, we aid our clients in establishing long term relationships with the most suitable lenders on optimal financing terms. Using an established, targeted process we help to move transactions along quickly and efficiently providing end-to-end assistance.

Link Asset Services is part of Link Group and provides the infrastructure to help capital flow through financial markets. We process £45bn of payments annually and are the largest independent loan servicer in Europe, with over £100bn of commercial and residential loans under management.

About the report

Our annual report is part of an initiative to increase knowledge and transparency in the UK lending market. The research is based on the collection of primary data over the first two months of 2019. The anonymous open market survey was sent out publicly, resulting in a data set of 100 respondents from 81 separate lenders active in the UK Real Estate Lending market. This means that our data comes direct from lenders, giving a true reflection of their expectation, capacity and appetite for the year ahead.

Ours is the largest dataset of any report on the UK real estate finance market.


Link Asset Services is a trading name of Link Asset Services (UK) Limited. Registered office, 65 Gresham Street, London, EC2V 7NQ. Registered in England and Wales No. 03376447

For further information, including the legal and regulatory status of this company, visit www.linkassetservices.com/legal-regulatory-status Produced in association with Teamspirit. The content of this article does not constitute advice and should not be relied on as such. Specific advice should be sought about your individual circumstances before any action is taken.

CONTACTS

James Wright Head of Real Estate Financet: +44 (0)207 954 9619e: [email protected]

Natalie KingCoordinatort: +44 (0) 207 204 7940e: [email protected]

Abbie Ward-CorderoyAnalyst t: +44 (0)207 397 6292e: [email protected]

0462–0319

mailto:[email protected]

market trend analysis - linkassetservices.com key findings welcome to the third issue of the market...

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