•  Political risks are now narrowly focused on Brexit negotiations, expected to impact the real estate market in late 2020
  • Mezzanine debt is significantly cheaper: margins on mezzanine loans fell nearly 100 bps year-on year
  • Lenders broadened sector coverage with interest surging for residential, office, and industrial real estate sectors
  • More than a third of lenders in the UK also lend into Western Europe and/or Ireland, with 97% able to finance loans in London
  • The trend for very large tickets is reversing, with lenders switching to prefer many smaller loans for the first time since 2017

Real estate lenders incorporated significant political risk into their outlook for 2020 according to Link Group’s Market Trends Analysis, the largest available dataset on the UK real estate finance market.

In a new survey of lenders in real estate finance most respondents (77%) cited Brexit uncertainty as the main risk to the market, although sentiment, as at the end of January 2020, was broadly positive. Most participants predicted a steady trajectory (or even small increase) to property prices this year.

External risks loom, beyond Covid-19

Just one survey respondent in Link Group’s Market Trends Analysis (MTA) cited a pandemic as the biggest risk to the commercial real estate market, over a month before the Covid-19 outbreak forced governments to place as much as one-fifth of the world’s population under lockdown with substantial ramifications for real estate markets and the broader global economy. 

Far more prominent were concerns around UK-EU negotiations, cited by 79% of respondents. Brexit will continue to affect the market during and after the pandemic, especially in Q4 2020. A further 6% cited general political risk.

This concern among lenders may be related to the prevalence of lending facilities from the UK into the rest of Europe. The MTA uncovered that over a third of lenders in the UK were also able to provide loans in Western Europe and/or Ireland. And with 97% able to lend in the London market, those sensitivities to EU-UK political risk were magnified.

CRE lending boosted by appetite from more investment sectors

Appetite for Commercial Real Estate (CRE) loans surged across multiple investment sectors in 2019, indicating that lenders have broadened their capabilities. The biggest surges came in the ‘beds’ sector: residential and student housing. Other core sectors such as office and industrial real estate also increased, and only retail declined (both in loans for investment and development).

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Preferences shift among CRE lenders

For the first time in some years, average maximum ticket size (i.e. the largest single loans that CRE lenders are prepared to make) declined. This indicates market participants are shifting towards keeping a more diversified loan book, a reversal of the trend seen in the years 2017-2019. This was also accompanied by a notable slowdown in the volume of very large transactions in the UK last year.

The long-term trend of lenders preferring longer maturities continued, with debt terms shorter than 5 years decreasing in preference and loan terms in excess of 5 years increasing again for 2020.

James Wright, head of real estate finance at Link Group, said:

'This year’s Market Trends Analysis shines a light on some key themes within the sector, but it also highlights the extent of uncertainty in real estate. This will now be exacerbated by uncertainty in the global macroeconomy. 
‘Looking beyond the current more challenging circumstances, clear changes in lenders’ preferences are visible: for example, in contrast to recent years, mezzanine debt became cheaper, with margins on these loans falling nearly 100 basis points year-on-year. Market players have been seeking higher returns and have subsequently shifted up their risk appetite in an attempt to capture them.’

Market trend analysis report

Market trend analysis report