Indeed, the value of outstanding loan books saw its first increase since 2008, according to the most comprehensive study of the UK’s commercial property lending market from De Montfort.

The total amount of outstanding debt at the year end in 2015 was £168.4 billion, representing a 1.9% increase from £165.2 billion at the year-end in 2014, and the first increase recorded since 2008.

Overall some £53.7 billion of loan originations were recorded during the whole of 2015, compared to £45.2 billion in 2014 and while new lending volumes rose, the proportionate increase moderated to 18.8% in 2014/2015, compared to a post-crisis record of 51.2% in 2013/2014.

The report says that further evidence that the market has recovered can be seen in the decline of almost 50% in the value of distressed loans, that is those in default and in breach of financial covenant. At the year-end in 2015, the value of distressed loans reported to the research was £12.1 billion, compared to £23.2 billion a year earlier and £47.6 billion at the end of 2009.

Loan to value (LTV) ratios on existing loans continue to fall, reflecting the rise in commercial property values and banks continuing to lend on similar terms to recent years. At the year-end in 2015, some 87.5% or £123.5 billion of outstanding debt had a LTV ratio of 70% or less, compared to 77% or £107 billion at the year-end in 2014 and 63% or £99 billion at year end in 2013.

Outstanding debt with a LTV between 71% and 100% represented 7.5% or £10.6 billion of the market, and just 5% or 6.9 billion had a LTV greater than 101%. Notably, average lending LTVs fell during the course of 2015 for all sub-sectors, suggesting good lender discipline despite the strength of the market.

Although they still dominate the market, UK banks and building societies saw their market share continue to decline. They represented 34% of new loan originations at year end in 2015, the lowest level ever recorded by the research, compared to 39% the previous year. The proportion of outstanding debt held on their books also fell, from 49% of the total at year end in 2014 to 45.5% in 2015.

For the first time, insurance companies were the second largest category of new loan originators, representing 16% or £8.57 billion of the total in 2015. The exposures of insurance companies now account for 15.1% or £25.4 billion of the market, compared to 12.7% or £21 billion in 2014.

Regional distribution of outstanding loans showed a strong bias in favour of central London; 43% of the total outstanding debt is secured against real estate in the capital city, the highest result ever recorded by the research, and a dramatic increase from the 26% recorded in 2010. This indicates a strong appetite by lenders, particularly those from overseas, for exposure to the UK’s biggest city.

Despite an overall increase in loan originations, the value of new development finance fell from £2.4 billion in 2014 to £2.25 billion in 2015. Banks, building societies and insurance companies increased their loan originations for commercial development projects from £1.57 billion in 2014 to £1.95 billion in 2015, but non-bank lenders saw a decline, from £0.8 billion in 2014 to £0.3 billion in 2015. 

The 2015 report demonstrated lenders’ continued preference for big ticket lending to both development and investment projects. Only 14% of banks, building societies and insurance companies were prepared to write a loan of £5 million or less for commercial investment projects, compared to 67% who would do so at above £100 million.
 

The research also highlights how the loan distribution market has changed behind the scenes. Securitisation remains in the doldrums, while syndication goes from strength to strength, with the value of loans syndicated roughly doubling for the second year running to £9.2 billion, up from £4.7 billion in 2014 and £2.1 billion in 2013.

‘The fall in value of distressed loans to very low levels coupled with a gradual increase in new loan originations hints at a robust and stable commercial property lending market. It will be interesting to see whether commercial real estate lending accelerates from here or grows in a more measured way,’ said Ion Fletcher, director of policy (finance) at the British Property Federation.

‘Given growing investor interest in the regions over the course of 2015 and the government’s efforts to devolve greater powers to local areas, it is perhaps surprising that lenders show such a strong preference for central London. Lenders also remain reluctant to lend at small ticket sizes, which raises questions about how smaller regional projects can access the finance they need to succeed,’ he added.

According to Peter Cosmetatos, chief executive of the lenders’ trade association CREFC Europe, the report confirms that in terms of fundamentals, sentiment and discipline, the market was in a good place coming into 2016 and the uncertainty provoked by the forthcoming referendum on the future of the UK in the European Union.

‘At a more structural level, the transformation of the loan distribution market is striking. North American banks that would traditionally have favoured securitisation are establishing themselves as a syndication powerhouse, almost certainly influenced by a combination of commercial and regulatory factors. This lender category was the only one to report syndicating more in 2015 than in 2014, accounting for well over half of the total value of loans syndicated,’ he said.

Tim Crossley-Smith, national head of valuation consultancy at Bilfinger GVA, believes that with new origination at its highest level since the financial crisis, the secured debt market continues its measured response to the easing of capital value growth that we have seen since last autumn and the more uncertain economic outlook.

‘With average loan to value ratios standing at lower levels than the end of 2014 and interest cover ratios increasing over the year, lenders are demonstrating a disciplined approach to changing circumstances, whilst the survey reassuringly confirms their long term commitment to the commercial real estate sector,’ he said.