Banks Retaking U.K. Property-Loan Turf Punish NewcomersPatrick Gower
Private-equity firms, pension funds and insurers face dwindling returns on loans to the U.K. commercial property market as competition intensifies from banks that shunned the business after the financial crisis.
A new lender has entered the market almost every week in the past year in search of higher returns as gilt yields neared record lows, according to brokers Savills Plc. The U.K. banking industry avoided the market following the collapse of Lehman Brothers Holdings Inc. in September 2008 because of regulatory requirements to meet stricter capital rules.
Greater competition on commercial-property loans has narrowed lending margins by as much as 2 percentage points in the past year, said Anthony Myers, a real estate executive at Blackstone Group LP. With U.K. commercial-property values rising for the first time since 2011 and balance sheets on the mend, British banks are increasingly willing to offer loans backing offices, stores, and industrial properties.
“Having to compete against the renascent energy being shown by the banks, the amount of fat in the margins has been squeezed out considerably,” said Ashley Goldblatt, head of real estate lending at Legal & General Group Plc’s Investment Management unit. The company set up its real estate lending business three years ago and is on track to have loaned 500 million pounds ($800 million) by the year-end.
Fifty real estate lenders entered the market in the 12 months through June, according to London-based broker Savills. Aviva Plc, Great-West Lifeco Inc.’s Canada Life, Jones Lang LaSalle Inc.’s LaSalle Investment Management affiliate, and Prudential Plc’s M&G Investments unit are among companies that have loaned 100 million pounds or more on deals in the past year, said William Newsom, a senior director at Savills.
Aviva’s U.K. Commercial Real Estate Senior Debt fund raised 187.5 million pounds from five investors in its second closing and is on track to meet its target of 500 million pounds in January 2015, the company said today in a statement.
Greater competition is narrowing interest-rate margins and starting to slow the influx of new entrants, Newsom said in e-mailed comments.
“I’m skeptical about the amount of business the senior debt funds are likely to do because interest-rate margins have come down,” Newsom said. “They have to provide investors with a certain level of return, so they’re in a bit of a bind.”
British lenders showed increased willingness to provide commercial property debt for the fourth straight quarter during the three months through September and that’s expected to continue through the end of the year, according to the Bank of England’s quarterly credit conditions survey.
“The improved economic climate and business confidence levels in recent months has seen an uplift in the commercial real estate market in general and hence an increase in demand for finance from a range of providers,” Susan Geddes, managing director of structured real estate finance at Banco Santander SA’s U.K. unit, said in e-mailed comments.
Lloyds Banking Group Plc and Banco Santander have increased their commercial-property lending in the past six to nine months, Chris Bates, head of European real estate finance at Cornerstone Real Estate Advisers LLC said by phone. The company, which has $28 billion of debt investments in the U.S., started lending for U.K. real estate a year ago and now has a 260 million-pound loan book.
“This increasing liquidity has meant pricing in London in particular has come down quite dramatically,” Bates said.
The U.K. commercial real estate values rose for the fifth straight month in September, posting the biggest gain since April 2010, Investment Property Databank Ltd. said Oct. 14. The recovery in commercial-property prices has also helped attract banks back to the loan market.
Banks and building societies provided 85 percent of all loans to commercial-property companies last year, according to data compiled by De Montfort University in Leicester, England.
“The reason banks only did 85 percent last year is because, for the majority of the year, they had to pull their reins in,” L&G’s Goldblatt said. “This year they’re back out in force.”