Lending activity on U.K. commercial property has softened compared to previous late-cycle real estate markets, industry observers say.
Prominent bankers and asset managers told a Loan Market Association seminar in London on Jan. 25 that lenders had shown greater discipline since the global financial-crisis credit crunch. Banks and building societies remained the most active lenders, writing much of the £21.4 billion in new loans during the first half of 2016, according to De Montfort University research. Total outstanding loan volumes have shrunk since the GFC, with total amount of debt secured by U.K. commercial real estate steadily declining from 2008 to 2015.
"There simply isn't the kind of credit exuberance which has characterized previous cycles," said John Feeney, Lloyds Bank global head of corporate real estate.
"We have very good reasons to believe that this time it is a little bit different, and I don't see the types of characteristics you would expect for a late-cycle real estate market," Feeney said. "That's not to say there isn't risk in the market and certainly one of the phenomena that we've being keeping an eye on of late is the existence of grey space — where major corporates may be looking to sublet and that can undercut the primary rental market."
HSBC Bank head of corporate real estate David Phythian said loan writing on commercial real estate was more subdued compared to "frothier" lending activity seen prior to the GFC. He said the current cycle wasn't as debt-fueled, with high levels of equity fixed in place. "There are a lot of people owning buildings now that have no pressing need to sell and they're not being driven by the cycle," Phythian said.
TH Real Estate head of debt Christian Janssen said most lenders had become very disciplined in their underwriting and faced competition on pricing. "A lot of lenders are saying their books don't need to grow, so there isn't this massive pressure to deploy capital," he said. "Most borrowers aren't demanding high leverage either."
The latest DMU commercial property lending research said there was £173.4 billion in outstanding debt against U.K. non-residential real estate as of mid-year 2016. The overall commercial property debt market grew 3.0% during the first six months of 2016 and grew 1.9% in 2015. Before then, the total outstanding amount of debt had fallen steadily since the market peaked at about £255 billion in 2008.
New loan originations were 13% lower in the first half of 2016 compared to the same period the year before, indicating a general slowdown in purchasing activity of new properties requiring debt.