Volumes of new lending to U.K. commercial property slumped by nearly a quarter in the first half of 2017 compared to the second half of 2016, according to an annual survey of the market.
New lending for commercial property totaled £17.6 billion in the first six months of the year, down 24% from £23 billion in the second half of 2016 and 18% from £21.4 billion in the year-ago period. Lending by U.K.-based banks dropped 28% compared with the previous half, to £8.12 billion, while lending by North American banks was down 64% at £652 million.
But the decrease was not the result of a deliberate pullback from the market, according to Nicole Lux, senior research fellow in the department of accounting and finance at De Montfort University, and one of the report's authors.
"No lender intends to cut lending; all lenders are keen to lend and are looking for yield and income. But there is little demand for debt from borrowers," Lux told S&P Global Market Intelligence in an email. "The story has gone from 'wall of debt' to 'wall of equity.'"
Although lending is down, levels of investment in the U.K. property market increased by 3.6% in the first six months of 2017, according to data from real estate services firm Savills.
Lending from insurance companies also fell, down 39% to £1.56 billion, as did lending from German banks, by 4% to £2.05 billion.
No new commercial mortgage-backed securities, or CMBS, were reported during the six-month period.
However, margins for lenders in the U.K. real estate market have improved, with the average margin for senior debt on a prime office building reportedly 209 basis points, up from 198 basis points at the end of 2016.
Loan-to-value ratios for new loans are coming down, with an average LTV of 58% for new loans at mid-year 2017, compared with 60% to 65% 12 months previously, according to the report.
The survey is based on responses from 78 financial institutions, comprising 43 banks, 11 insurance companies and 24 other nonbank lenders. This compares with the pre-global financial crisis years, when the market for commercial property lending was dominated by banks: out of 58 lenders in the 2007 survey, all were banks apart from five insurance companies.
As of mid-2017, the study captured £166 billion of commercial property debt outstanding in the U.K., of which 77% was held by banks, 14% by insurance companies and 9% by other nonbank lenders. The study also identified a further £28.6 billion in the financial statements of lenders who did not participate.
In addition, there is thought to be approximately £16.4 billion of outstanding CMBS in the U.K., although volumes have been "constantly reducing" since the global financial crisis, according to the report.