A recent report has highlighted the hard times for commercial property owners. UK commercial property lending fell 23% year on year in 2020 – and is likely to become more expensive and require higher deposits for borrowers in the next two to five years, according to the latest UK Commercial Real Estate Report from the Cass Business School.
The report revealed that despite improved activity in the second half of 2020, the market lagged behind volumes reached in 2019, reaching just £33.6bn. Underperforming loans where borrowers are having issues in repaying them rose sharply from 4.8% to 8.6% of outstanding loans thus highlighting the fact that some commercial property owners are having cashflow issues currently.
The report also showed that loan-to-value ratios reached a new historic low, averaging between 50% and 55%, however, it found that rates rose across all property types by between 0.25% and 0.75%, which means it is harder to obtain a decent return on your capital that you invest. Lending activity was dominated by loan extensions and refinancing, which accounted for 57% of all new lending, highlighting that investors are trying to make the best of what they have rather than expanding portfolios.
The report also found that while at least 40 to 50 lenders were actively lending in most prime property sectors, only 13 lenders considered lending against secondary retail, with just three lending against shopping centres. This is one of the reasons high streets all over the UK are suffering.
Dr Nicole Lux, senior research fellow at the Business School and author of the report, said: “Loan book quality differs substantially across different lenders and it has become apparent that lenders with loan books up to £1bn have generally lent against assets of lower quality.
“We predict that real estate lending will become more expensive and require further capital for borrowers across the next two to five years, due to increasing maintenance and improvement requirements to meet higher ESG standards.”
So commercial property owners are getting hit hard by the increase in cost of borrowing and the requirement by lenders for higher deposits, that is if they have the appetite to lend at all.
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