16
Market Trend Analysis Issue 4 | April 2020
Market TrendAnalysisIssue 4 | April 2020
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 13
About us 15
James Wright Head of Real Estate Financet: +44 (0)207 954 9619e: [email protected]
Abbie Ward-CorderoyAnalyst t: +44 (0)207 397 6292e: [email protected]
David TearneAnalyst t: +44 (0)207 204 7901e: [email protected]
Link Group | Market Trend Analysis • 2
Key Findings
Welcome to the fourth edition of our Annual Market Trend Analysis Report.
This year’s edition comes at a strange time for our market as well as for the economy as whole and, indeed, our society. Our industry is responding to the challenges posed and changes imposed by the current pandemic. The market outlook has shifted significantly between the point of data collection, in January, and the report publication, in April. Covid 19 was emerging in China as data was collected but was not seen to be a major threat to the market. The data is a relevant snapshot of the sentiment, appetite and capabilities of real estate lenders at the start of the year but must be viewed within the context of what has occurred since.
Many thanks to all of our respondents.
Key Findings
Negotiations with the EU are expected to impact on the market towards the
end of the year.
Margins on mezzanine loans are nearly 100 bps lower than last year.
Appetite surged across multiple
investment sectors this year.
Political risks are now
narrowly focused on Brexit
Mezzanine debt is
significantly cheaper
Lenders have broadened sector
coverage
We found more than a third of lenders in the UK are also able to lend into Western Europe and/or into
Ireland.
European lending is
prevalent among UK lenders
The trend for very large ticket
preference is reversing, although there is still good availability for big
financings.
Reduced focus on large ticket
size
Link Group | Market Trend Analysis • 3
Market Sentiment
Lenders are significantly more optimistic this year than last. Around half of respondents expect their team sizes to increase this year with the remainder expecting no material change. Interestingly, an overwhelming 82% of lenders expect new loan originations to grow in 2020, the highest proportion ever.
The expectation on LTVs has shifted significantly to the upside with 91% of respondents forecasting LTVs to remain similar or increase in 2020. In 2019, 98% were expecting them to remain similar or decline; a huge swing in sentiment.
Loan pricing expectations are balanced, as are forecasts on UK Base and Gilt rates, with stability anticipated.
In 2019, the overwhelming consensus was for property prices to decline by more than 2.5% across the board with commercial values expected to
fare worst. This year portrays a much more stable outlook with around three quarters of respondents expecting property prices to remain unchanged. 2020 is supported by greater political stability and accommodative monetary policy but some key headwinds remain.
Decrease Remain similar Increase
17%
21%
23%
9%
7%
7%
1%
1%
71%
72%
58%
52%
86%
89%
17%
50%
12%
7%
20%
39%
7%
4%
82%
49%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
UK CommercialProperty Values
UK ResidentialProperty Values
Pricing on New Loans(Margin & Fees)
LTV on New Loans
UK Treasury Gilts
UK Base Rate
New LoanOriginations
Size of team
This year portrays a much more stable outlook with around three quarters of respondents expecting property prices to remain unchanged.
Link Group | Market Trend Analysis • 4
What is the biggest risk to the CRE market in the coming year?
Brexit continues to dominate respondents’ market fears with 77% of respondents citing this as the greatest risk in the year ahead. The UK is now in a transition period with the EU which ends on 31st December 2020. Both sides would like a close future trading relationship but it is expected to be challenging to complete negotiations within the existing timeframe. This uncertainty coupled with the prospect that no deal may be struck before the deadline constitutes the single greatest risk to the market in 2020 according to respondents. Elsewhere 11% of respondents cited a global recession as the biggest risk and 6% cited general political risk.
Our data is collated throughout the month of January and, at the time, a global pandemic was considered to be a very minor risk with just 2% of respondents identifying it as the greatest threat to the market.
Brexit
Global Recession
Help 2 Buy Reduction
Global Pandemic
General Political Risk
Rental Market Decline
77%
11%
6%2% 2% 2%
Brexit
Global Recession
Help 2 Buy Reduction
Global Pandemic
General Political Risk
Rental Market Decline
77%
11%
6%2% 2% 2%
Link Group | Market Trend Analysis • 5
Leverage & Pricing – Investment Loans
Average Maximum LTV by Lender Type
Average Maximum LTV Year on Year
Last year, two thirds of respondents expected LTVs to remain stable in the UK market. In 2020, we’ve seen average maximum LTV across all loan types drop by a modest 2% from 2019 data to 67%.
Hedge Funds have moved from offering the second highest average maximum LTV to top spot this year, at 83%. Alternative Lenders, who offered the highest leverage last year, have fallen back to third place, at 75% LTV, having also been surpassed by Debt Funds (76%).
There were no significant changes to lenders’ maximum leverage points for investment loans, with all lenders remaining within a 5% variance of their 2019 average maximum LTV.
2020 2019 2018
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MiddleEastern Bank
Pension fund
European Bank
Pfandbrief Bank
UK Bank AsianBank
Insurance Company
Peer to Peer Lender
North American Bank
Debt Fund
Hedge Fund
AlternativeLender
LTV
(%)
Mezzanine leverage averages a maximum of 80% LTV with many lenders stretching as high as 85% before entering preferred equity territory.
Senior Loans Whole Loans Mezzanine Loans Preferred Equity Bridge Loans
0%
20%
40%
60%
80%
100%
Ave
rage
Max
imum
LTV
(%)
AlternativeLender
Hedge Fund
Debt Fund
North American Bank
Peer to Peer Lender
Insurance Company
AsianBank
UK Bank Pfandbrief Bank
European Bank
Pension fund
MiddleEastern Bank
Link Group | Market Trend Analysis • 6
Pension Funds and Pfandbrief Banks are able to offer the lowest average margins for Investment Loans at 188 bps. Pfandbrief Banks just pip it this year by offering slightly lower arrangement fees at 75 bps on average against Pension Funds’ 86 bps. In 2020, Pfandbrief Banks benefit from the clarity provided on the funding prospects for UK loans with Pfandbrief bonds after the Bundesrat’s adoption of the Tax Act relating to Brexit last year.
North American Banks still offer very attractively priced Mezzanine Loans but this year UK Banks have indicated that they have some Mezzanine debt priced at the lowest average margin of 600 bps. However, for North American Banks, you’ll need an average minimum ticket size of £63m, which is pretty significant for mezzanine loans. For UK Banks this Mezzanine is, firstly, very low leverage in comparison to most (at 70% average maximum LTV) and is generally restricted to existing clients the banks are seeking to support.
For Whole Loans, North American Banks offer the lowest average rates closely followed by Insurance Companies.
Margin by Loan Type Year on YearAcross the previous three years we had seen pricing increase for Mezzanine Loans and reducing year on year for Senior Loans. This year, however, that trend reversed as average Mezzanine Loan margins have fallen by 93 bps while Senior Loans are 38 bps more expensive on average.
Average margins on Bridge Loans fell significantly last year and have remained fairly static in 2020 (+26 bps) to stand at an average margin of 773 bps. Bridge lending clearly remains a highly competitive space.
20192020 2018 2017
SeniorLoans
WholeLoans
MezzanineLoans
BridgeLoans
PreferredEquity
0
200
400
600
800
1000
1200
1400
1600
Ave
rage
Mar
gin
(bps
)
Senior Loans Whole Loans Mezzanine Loans Preferred Equity Bridge Loans
200
0
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Alternative Lender
HedgeFund
DebtFund
North AmericanBank
Peer to Peer Lender
InsuranceCompany
AsianBank
UK Bank PfandbriefBank
EuropeanBank
Pension Fund
Middle Eastern Bank
Ave
rag
e M
arg
in (b
ps)
Average Margin by Lender type
Link Group | Market Trend Analysis • 7
Last year we saw ICR and DSCR covenants unexpectedly converging. This year the trend reversed with both indicators moving upwards, suggesting a renewed focus on income during the loan term.
1.2
1.3
1.4
1.5
1.6
1.7
2017 2018 2019 2020
Average ICR (%) Average DSCR (%)
Inco
me M
ultip
le
Income Covenants Year on Year
‘Relative Value’ by Lender Types – Investment Loans
40%
50%
60%
70%
80%
100 300200 400 600500 700
Ave
rage
Max
imum
LTV
(%)
Average Margin (bps)
Hedge Fund Peer to Peer Lender Debt Fund Alternative Lender UK Bank Middle Eastern Bank
European BankNorth American Bank Pfandbrief Bank Asian Bank Pension Fund Insurance Company
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.
Link Group | Market Trend Analysis • 8
Leverage & Pricing – Development Loans
Overall average maximum leverage for development has remained constant at 74% LTC and 65% LTGDV.
Despite having stepped back slightly from 2019, Alternative Lenders still offer the highest average maximum LTC (82%). Their average maximum LTGDV (68%) is bettered by Debt Funds (69%) and matched by Hedge Funds this year. Alternative Lenders, however, charge the second highest average margin at 905 bps with only Hedge Funds, at 973 bps, requiring a higher average margin for development loans.
The lowest cost development finance is provided by different lenders depending upon the type of project being financed. We have examined the best financing options for development projects under the given assumptions including required margin, arrangement, exit and non-utilisation fees.
The lowest cost finance provider in each category has changed from 2019. Last year European and UK banks dominated the cheapest project finance table, winning six category between them.
Average Maximum Leverage by Lender Type
Project typeCheapest overall finance cost*
Commercial Development 100% Pre-let Pfandbrief Bank
Commercial Development Part Pre-let UK Bank
Commercial Development Speculative Middle Eastern Bank
Residential Development for Sale Asian Bank
Residential Development for Hold & Rent Pfandbrief Bank
Land Loans with Planning Middle Eastern Bank
Land Loans without Planning Middle Eastern Bank
* Based on a 2 year development at average margin, fees and LTC for each lender category for the relevant project type and run on a standard S-Curve schedule with full repayment at PC
LTC (%) 2020 LTGDV (%) 2020LTC (%) 2019 LTC (%) 2018 LTGDV (%) 2019 LTGDV (%) 2018
Alternative Lender
Asian Bank
Pfandbrief Bank
Debt Fund
Peer to Peer Lender
UK Bank NorthAmerican Bank
Hedge Fund
Insurance Company
European Bank
MiddleEastern Bank
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Ave
rage
Max
imum
Lev
erag
e (%
)
This year Middle Eastern Banks are the lowest cost finance providers for land loans and for speculative commercial development. Where commercial developments are part pre-let, UK banks become more competitive and, when fully pre-let, Pfandbrief Banks can offer the cheapest form of funding. For residential developments, Asian Banks provide the lowest funding costs for projects to sell and Pfandbrief Banks can do so for those which are held to rent.
Link Group | Market Trend Analysis • 9
This chart shows the proportion of responding lenders who can fund various Development Loan types.
Availability: Development Loan Types
– 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
For our ‘relative value’ chart in development loans, as always, we use what we consider to be the most important indicators of leverage and pricing; average maximum LTC and average margin. Notably Middle Eastern Banks, Debt Funds and Alternative Lenders are offering very good ‘relative value’. Insurance Companies, as they did last year, offer poor ‘relative value’ for development loans in contrast to their low cost good ‘relative value’ offering on investment loans.
North American Banks and Pfandbrief Banks halted development lending in the UK at the start of 2019 but have resumed activity in this space in 2020. We suspect this is as a result of the increased certainty in UK political outlook which has improved securitisation and syndication prospects as well as, in the case of Pfandbrief Banks, the clarity on Pfandbrief funding of UK assets.
Hedge Fund Peer to Peer Lender Debt Fund Alternative Lender UK Bank Middle Eastern Bank
European BankNorth American Bank Pfandbrief Bank Asian Bank Pension Fund Insurance Company
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
100 300 500 700 900 1100 1300
Ave
rage
Max
imum
LTC
(%)
Average Margin (bps)
Alternative Lender 53% 53% 37% 21% 37% 32% 26%
Asian Bank 40% 20% 20% 20% 40% 20% 20%
Debt Fund 60% 53% 40% 33% 60% 53% 53%
European Bank 33% 22% 0% 0% 44% 11% 0%
Hedge Fund 38% 38% 25% 13% 50% 50% 38%
Insurance Company 13% 25% 13% 13% 25% 25% 25%
Middle Eastern Bank 100% 50% 25% 25% 75% 75% 25%
North American Bank 50% 100% 50% 50% 50% 50% 50%
Peer to Peer Lender 100% 40% 100% 40% 0% 0% 0%
Pension Fund 0% 0% 0% 0% 0% 0% 0%
Pfandbrief Bank 0% 33% 0% 0% 50% 17% 17%
UK Bank 64% 57% 21% 14% 43% 29% 0%
‘Relative Value’ by Lender Type – Development Loans
Link Group | Market Trend Analysis • 10
Availability – Sector & Geography
BUY Build to Rent
& Student Housing
HOLD Office & Industrial
/ Logistics
SELL Retail
Lenders’ Preference by Sector
We saw a surge in appetite across investment sectors this year indicating lenders have broadened their ability to lend into multiple sectors.
The largest surges in lender appetite was seen in the ‘beds’ sectors notably residential and student housing. Other core investment sectors such as office and industrial/logistics saw an increase in appetite with only retail declining in preference across both investment and development lending.
Lenders’ preference for the development of new hotel, retail and leisure projects declined and, to a smaller extent, residential projects built to sell. Lenders are more cautious about the market for these assets at the point a development may be completed in the future.
2020 2019 2018 2017 2020 2019 2018 2017
Offi
ce
Res
iden
tial,
Bui
ld t
o H
old
Res
iden
tial,
Bui
ld t
o S
ell
Hea
lthca
re
Leis
ure
Leis
ure
Hea
lthca
re
Res
iden
tial
Hot
el
Ind
ustr
ial
/ lo
gist
ics
Stu
den
tH
ousi
ng
Ret
ail
Ret
ail
Hot
el
Ind
ustr
ial
/ lo
gist
ics
Offi
ce
Stu
den
tH
ousi
ng
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Pro
por
tion
of r
esp
ond
ents
Pro
por
tion
of r
esp
ond
ents
Investment Development
Link Group | Market Trend Analysis • 11
Central London remains lenders’ most preferred region with a consistent 97% of lenders able to lend there. However other areas of the UK have caught up in 2020, notably the South West.
Scotland 71%
North 88%
Midlands 92%
South East 96%
London 97%
Wales 77%
South West 92%
Northern Ireland <45%
West Europe 39%
Ireland 36%
Nordics 27%
CEE 16%
Baltics 3%
South Europe 16%
For the first time in 2020 we have added a question on appetite of lenders in the UK for European debt exposure. We found more than a third of lenders in the UK are also able to lend into Western Europe and/or into Ireland.
Link Group | Market Trend Analysis • 12
Loan Maturity & Ticket Size
Average Maximum Ticket Size
Loan Maturity - Investment loans
Investment
Loan
Siz
e (£
m)
Development
0
50
100
150
200
250
2017 2018 2019 2020
We saw a continuation of the long term trend in lenders’ preferences on loan maturity with debt terms shorter than 5 years decreasing in preference and those loan terms in excess of 5 years increasing.
Maximum loan size has decreased for the first time since 2017, from an average of £226m and £148m for investment and development loans respectively in 2019, to £171m and £121m in 2020. However, average maximum ticket size remains higher than that recorded in both 2017 and 2018. Despite the decline, there are still four lenders who will offer investment loans in excess of £500m and five who will offer development loans in excess of £250m.
20192020 2018 2017
% o
f Res
pon
den
ts
0-2 Years 3-5 Years 6-7 Years 8-10 Years 10+ Years0%
10%
20%
30%
40%
50%
60%
70%
Link Group | Market Trend Analysis • 13
UK Banks EuropeanBanks
AsianBanks
MiddleEastern Banks
Insurance Company
PfandbriefBanks
NorthAmerican Banks
DebtFunds
HedgeFunds
AlternativeLenders
Peer to PeerLenders
0m
100m
200m
300m
400m
500m
500m+
50 5520 20 35
63
100 100100
400 400
Individual responseMedian Range
Maximum Investment Loan Ticket Size by Lender Category
Maximum Development Loan Ticket Size by Lender Category
UK Banks PfandbriefBanks
EuropeanBanks
AsianBanks
MiddleEastern Banks
Insurance Company
DebtFunds
HedgeFunds
PensionFunds
NorthAmerican Banks
AlternativeLenders
Peer to PeerLenders
Individual responseMedian Range
0m
100m
200m
300m
400m
500m
500m+
48
100 100125
250
400
100
225
10 2043
63
Link Group | Market Trend Analysis • 14
About us
About us
The Real Estate Finance division of Link Group 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 Group 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 month of 2020. The anonymous open market survey was sent out publicly, resulting in a data set of 98 respondents from 83 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 number of respondents for any report on the UK real estate finance market.
Link Group | Market Trend Analysis • 15
CONTACTS
James Wright Head of Real Estate Financet: +44 (0)207 954 9619e: [email protected]
Abbie Ward-CorderoyAnalyst t: +44 (0)207 397 6292e: [email protected]
David TearneAnalyst t: +44 (0)207 204 7901e: [email protected]
0662–0420
