research findings of the survey into the uk …nicole lux • trends in value of outstanding debt...

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

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

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

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

research findings of the survey into the uk …nicole lux • trends in value of outstanding debt...

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