MARKET TREND ANALYSIS - ISSUE 5 MARCH 2021 - BCMGlobal
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
MARKET TREND
ANALYSIS
ISSUE 5
MARCH 2021
Part of Link Group, listed on the Australian Securities Exchange
CONTENTS
Introduction and Market Overview 3
Key Findings 4
Market Sentiment 5
Leverage & Pricing – Investment Loans 7
Leverage & Pricing – Development Loans 10
Availability – Sector & Geography 12
Loan Maturity & Ticket Size 14
About Us & Methodology 16
Our Team
Tim Schuy
Head of Real Estate Finance
+44 (0)207 397 4595
+44 (0)793 551 3855
tim.schuy@bcmglobal.com
David Tearne
Senior Analyst
+44 (0) 207 204 7901
+44 (0) 7849 624 209
david.tearne@bcmglobal.com
Natalie King
Executive Assistant
+44 (0)207 204 7940
+44 (0)754 758 5265
natalie.king@bcmglobal.com
2
INTRODUCTION
Welcome to the fifth issue of the Market Trend
Analysis from BCMGlobal.
This year, we analyse the visible market trends through our datasets across the last five
years and assess market prospects for 2021. As with our previous reports, we focus on
lender sentiment, appetite, capabilities, and projections for the year ahead.
The last year has brought extraordinary change to the real estate market. The difficulty
of valuing assets in industries that have been unable to function normally and whose
future shape is still unclear, the Covid-recession itself, and high levels of caution have
had numerous consequences, including eliminating funding options altogether for the
worst-hit sectors.
The mix of lenders has changed dramatically too. The UK’s big clearing banks have
stepped back from new business, to limit the impact of what is now considered riskier
lending on their capital ratios. That has left the field clear for alternative lenders to meet
the demand for refinancing and new project funding, resulting in overall stability in
pricing and limiting the reduction in sector-specific availability.
For a price, these lenders are able to offer funding in a wider range of risk brackets, in
some cases having appetite for positions right up to preferred equity, something way
beyond the scope of a traditional bank. Throughout the pandemic, completion times
have extended considerably, due to more thorough due diligence combined with the
significant volume increases alternative lenders have seen.
Our 2021 survey is part of an initiative to increase knowledge and transparency in the
UK lending market. We have polled lenders directly, meaning our findings give a true
reflection of their expectations, capacity and appetite for the year ahead. Levels of
uncertainty are higher than usual as we all wait to see how quickly and sustainably the
economy can reopen and what that means for the real estate market.
Many thanks to all our respondents.
Tim Schuy
Head of Real Estate Finance
Link Group
Market Trend Analysis 3
KEY FINDINGS
VALUE STABILITY POST-PANDEMIC
Lenders overwhelmingly expect RECOVERY
residential and commercial Market focusing on the ongoing
property prices to be flat in recovery after the pandemic
2021, in both residential and but rising unemployment in
commercial sectors. the UK and economic fragility
are concerns; Brexit concerns
taking a back seat.
TICKET SIZE LENDERS CAUTIOUS
DIVERGENCE ON COVID-HIT
Higher average maximum SECTORS
ticket size for investment loans
Investment loan availability has fallen
than last year, but lower for
most for sectors hit by the pandemic,
development loans.
but supply of development loans is
more robust.
COVENANT PRICING COMPETITION
SCRUTINY AT HIGHER LEVERAGE
Lender caution is demanding POINTS
much higher interest cover. Lenders have reduced preferred equity
leverage they will offer, but pricing is
much keener, narrowing the gap with
mezzanine finance.
EXPANDING
HORIZONS
Lenders keener than last year
to expand across all European
jurisdictions – most notably
Western Europe & the Nordics.
4
MARKET
SENTIMENT
Lenders are relatively positive on property prices for the year
ahead, both for the residential and commercial sectors.
The vast majority (80% and 74% respectively) think were trading on negative yields. Certainly some
property values will hold firm, but among those respondents were open to the likelihood that gilt
expecting them to change, approximately twice yields would rise but this is perhaps happening
as many think they will fall than think they will rise. more quickly than they expected. Overall, three
The picture is, however, more optimistic than last quarters expected no change in gilt yields,
year, even though the 2020 survey was conducted however 96% think the base rate is going to be
before the pandemic hit. Last year, political the same or lower by the end of the year.
upheaval and Brexit loomed large but these
The full impact of the pandemic caught most
issues have subsided and now lenders are instead
people off guard. 82% of lenders last year
relieved to see light at the end of the Covid tunnel.
expected to increase originations – certainly
With the economy turning up, lenders are in hiring not how things turned out. This year 64%
mode. More than half will add staff this year with expect an increase, and with the worst of the
less than 4% expecting to make cuts– perhaps pandemic seemingly behind us, only 6% think
making up for any hiring freezes over 2020. originations will fall compared to 2020.
Even so there is caution. More than half (55%) of With the majority of lenders expecting a reduction
lenders expect loan-to-value ratios (LTVs) to be in new loan pricing (and only 4% expecting an
unchanged, but three times as many (34% v 11%) increase), it appears that lenders in general are
expect an overall reduction. When we conducted eager to get money out the door in 2021.
the survey, gilts of all maturities up to five years
Respondent Expectations
Size of team 4% 44% 52%
New Loan Originations 6% 30% 64%
UK Base rate 18% 78% 4%
UK Treasury Gilts 6% 76% 18%
LTV on New Loans 34% 55% 11%
Pricing on New Loans
(Margin & Fees) 53% 43% 4%
UK Residential
Property Values 14% 80% 6%
UK Commercial
Property Values 17% 74% 9%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
DECREASE REMAIN SIMILAR INCREASE
Market Trend Analysis 5
What is the biggest risk to the commercial real estate
market in the coming year?
GLOBAL PANDEMIC/COVID 69%
RECESSION (UK) 12%
CLIENT RETENTION 6%
DECREASING TENANT DEMAND 5%
UNEMPLOYMENT 5%
BREXIT 2%
RESIDENTIAL CRASH 2%
In January 2020, 77% of lenders thought None of our respondents felt that a global
Brexit would once again present the biggest recession presented the biggest risk this
challenge for the year. This might have been year (compared to 11% last year) with the
so, were it not for Covid-19. Last year, only focus shifting inward to the potential of a
one insightful lender correctly predicted a UK recession (our second highest response)
global pandemic as the highest risk factor. being a bigger worry to the stability of the
UK CRE market in the year to come.
Of course, now Covid is top of lenders’ minds. 69%
consider it the key risk factor to the UK commercial Changes to working and shopping patterns
real estate market for 2021; this year saw only one may be behind concerns over falling
respondent place Brexit at the top of the risk list. tenant demand and client retention.
With the UK having endured its worst recession
in 300 years, unemployment now features
as a key concern for commercial real estate
(CRE) lenders for the first time since we began
our Market Trend Analysis five years ago. The
government has offered further furlough
support since we ran the survey, but an eventual
increase in unemployment when the furlough
scheme is withdrawn seems inevitable.
6LEVERAGE & PRICING
INVESTMENT LOANS
Most categories of lenders are reducing the maximum North American banks have seen the biggest decrease
LTVs they offer this year as the graph shows. The average in maximum LTV of seven percentage points, though
decline over the various lender categories is just over since the data was collected, the great success of
two percentage points. European banks, Middle Eastern the UK vaccine rollout has significantly increased
banks and pension funds are bucking the trend however, confidence. Anecdotally we are hearing that US lenders
and appear to be continuing the upward trajectory of have a much greater appetite now for UK business
maximum LTV seen over previous years despite the and we expect LTVs to rise as the year progresses.
wider issues encountered over the last 12 months.
Although they have seen a drop of 5 percentage
points, hedge funds retain the top spot with
an average maximum LTV of 78%.
Average Maximum LTV
90%
80%
70%
Average Leverage (%)
60%
50%
40%
30%
20%
10%
0%
ALTERNATIVE
LENDER
HEDGE
FUND
DEBT
FUND
NORTH
AMERICAN
BANK
PEER TO PEER
LENDER
INSURANCE
COMPANY
ASIAN BANK
UK BANK
PFANDBRIEF
BANK
EUROPEAN
BANK
PENSION
FUND
MIDDLE
EASTERN
BANK
2019 2020 2021
Since lenders overall are reducing LTVs, naturally that is highest or equal-highest leverage in all loan categories for
impacting on specific product lines too. Our respondents the second year running.
have modestly reduced maximum LTV this year across all
The average maximum LTV of preferred equity stood out
loan types, with an average decrease of just under two
most, declining from 90% to 83%.
percentage points across the board for the highest LTV
offering in each loan category. Hedge funds offered the
Average Maximum LTV by Lender Type
100%
80%
Average Leverage (%)
60%
40%
20%
0%
ALTERNATIVE
LENDER
HEDGE
FUND
DEBT
FUND
NORTH
AMERICAN
BANK
PEER TO PEER
LENDER
INSURANCE
COMPANY
ASIAN BANK
UK BANK
PFANDBRIEF
BANK
EUROPEAN
BANK
PENSION
FUND
MIDDLE
EASTERN
BANK
SENIOR LOANS WHOLE LOANS MEZZANINE LOANS PREFERRED EQUITY BRIDGE LOANS
Market Trend Analysis 7When viewed in context of the leverage Margin by Loan Type Year on Year
data, there has been a slight reduction in risk
preference. But the only significant change has 1600
been at the high side of leverage. This is most 1400
likely related to the wider issues caused by the
1200
pandemic – for example valuation uncertainty.
Similarly, loan pricing has also remained relatively 1000
static, with a drop in pricing in the preferred 800
equity space from an average of 13% to 10% 600
to make up for the lower leverage on offer. 400
This has also resulted in a narrowing of the 200
gap between mezzanine and preferred equity 0
pricing and leverage, which might give cause for SENIOR WHOLE MEZZANINE BRIDGE PREFERRED
LOANS LOANS LOANS LOANS EQUITY
borrowers generally operating in the mezzanine
space to consider moving up the leverage curve. 2017 2018 2019 2020 2021
Average Margin by Lender type
1400
1200
Average Margin (bps)
1000
800
600
400
200
0
ALTERNATIVE
LENDER
HEDGE
FUND
DEBT
FUND
NORTH
AMERICAN
BANK
PEER TO PEER
LENDER
INSURANCE
COMPANY
ASIAN BANK
UK BANK
PFANDBRIEF
BANK
EUROPEAN
BANK
PENSION
FUND
MIDDLE
EASTERN
BANK
SENIOR LOANS WHOLE LOANS MEZZANINE LOANS PREFERRED EQUITY BRIDGE LOANS
For the second year running, pension funds are able to offer represent a great low-cost option for UK senior investment
the lowest average margins for investment loans at 192bps. loans and we had a number of Pfandbrief respondents
Pfandbrief banks were tied with them as the cheapest pricing senior loans in the 175-200 bps range.
lenders last year, but they appear at first glance to be less
North American banks and insurance companies have the
competitive for the UK market this year.
next-lowest average margins for investment loans at 225 bps
This could potentially be explained by the fact that we and 229 bps respectively.
surveyed an increased number of Pfandbrief banks this
year, some of which have a slightly higher margin banking
product than a traditional Pfandbrief bank. This has brought
the average margin up slightly, however Pfandbrief banks still
8When we average data within each lender category, we can assess their “relative value” based on
maximum leverage offered against margin pricing. The lender categories above the line are relatively
“good value”, offering higher maximum leverage for lower average margins when compared to
those below the trend line. The below relative value graph uses data for Senior Loans only.
Relative Value by Lender Types – Investment Loans
80%
75%
Average maximum LTV (%)
70%
65%
60%
55%
50%
0 100 200 300 400 500 600 700
Average margin (bps)
ALTERNATIVE LENDER HEDGE FUND DEBT FUND NORTH AMERICAN BANK PEER TO PEER LENDER INSURANCE COMPANY ASIAN BANK
UK BANK PFANDBRIEF BANK EUROPEAN BANK PENSION FUND MIDDLE EASTERN BANK
The interest cover ratio (ICR) required by Income Convenants Year on Year
lenders for investment loans continues its
1.8
upward trend since 2019. In 2021, lenders are
demanding an extra 22 percentage points 1.7
of cover compared to 2020. Debt service 1.6
coverage ratios (DSCR) are also rising.
1.5
I n co me m u l t i pl e
It’s clear that lenders are more cautious in the 1.4
wake of the pandemic and have taken steps to
1.3
ensure borrowers can meet interest payments.
1.2
2017 2018 2019 2020 2021
AVERAGE ICR (%) AVERAGE DSCR (%)
Market Trend Analysis 9LEVERAGE & PRICING
DEVELOPMENT LOANS
There was no significant changes to the overall Alternative lenders once again offered the largest LTC (79%),
average maximum leverage on offer for though even they have reduced this by three percentage
developments - 73% loan-to-cost (LTC) and 63% points since 2020. Alternative lenders are also generous on
loan-to-gross-development-value (LTGDV). LTGDV, offering 69%, second only to hedge funds (71%).
Average Maximum Leverage by Lender Type
100%
80%
Average Leverage (%)
60%
40%
20%
0%
ALTERNATIVE
LENDER
PEER TO PEER
LENDER
DEBT
FUND
ASIAN BANK
HEDGE
FUND
UK BANK
MIDDLE
EASTERN
BANK
INSURANCE
COMPANY
EUROPEAN
BANK
NORTH
AMERICAN
BANK
PFANDBRIEF
BANK
PENSION
FUND
LTC (%) 2021 LTC (%) 2020 LTC (%) 2019 LTGDV (%) 2021 LTGDV (%) 2020 LTGDV (%) 2019
The lowest cost development finance is provided
Cheapest overall by different lenders depending upon the type of
Project type project being financed. We have examined the
finance cost*
best financing options for a standard development
Commercial Development
European Bank project considering variables such as required
100% Pre-let
margin, arrangement, exit and non-utilisation fees.
Commercial Development
Pfandbrief Bank
Part Pre-let Middle Eastern banks have retained the top spot
Commercial Development for a second year for cheapest overall finance cost
Middle Eastern Bank for both speculative commercial development and
Speculative
land loans with and without planning.
Residential Development
European Bank
for Sale European banks have also returned to the market,
Residential Development offering the cheapest finance in three categories.
European Bank
for Hold & Rent They did not feature in 2020 which we believe
was related to the uncertainty caused by the fear
Land Loans with Planning Middle Eastern Bank
of a cliff-edge Brexit at the end of 2019. Now they
are responding positively to the rapid vaccine
Land Loan without Planning Middle Eastern Bank
programme in the UK and the economic recovery
it should bring.
* Based on a 2 year development at average margin, fees and LTC for each
lender category for the relevant project type and run on a standard S-Curve After featuring for the past four years, UK banks
schedule with full repayment at PC do not appear at all as cheapest capital for any
development sector in 2021. This is likely to be
related to more cautious risk management of their
loan portfolios and the slower reaction times of
more traditional lenders.
10‘Relative Value’ by Lender Type – Development Loans
85%
80%
75%
Average maximum LTC (%)
70%
65%
60%
55%
50%
0 100 300 500 700 900 1100 1300
Average margin (bps)
ALTERNATIVE LENDER HEDGE FUND DEBT FUND NORTH AMERICAN BANK PEER TO PEER LENDER INSURANCE COMPANY ASIAN BANK
UK BANK PFANDBRIEF BANK EUROPEAN BANK PENSION FUND MIDDLE EASTERN BANK
For our ‘relative value’ chart for development loans, A strong option for lower leverage development
as always, we use what we consider to be the most financing is presented by Middle Eastern
important indicators of leverage and pricing; average banks, offering 69% LTC at 425bps.
maximum LTC and average margin. The best ‘relative
Insurance companies who have historically represented
value’ in development loans is offered by peer-to-peer
poor value for money have greatly improved their
lenders, which offer 78% LTC at pricing of 696 bps. This
offering this year. They now feature firmly above
is an improvement on their offering last year which put
the good value trend line with an increased LTC
them below the good-value trendline with average
of 74% and a reduced margin of 752 bps.
leverage of 75% and pricing of 835 bps. This may suggest
the sector is maturing and is becoming more price-
competitive with its longer-established competitors, and
becoming an option for lower-risk development projects.
Availability: Development Loan Types
Generally speaking this year there is less availability of lending, with a higher number of lenders recording no appetite
at all for some development types. Obtaining land loans both with and without planning may be more difficult this
year than in previous years, with a large number of lender types having little interest in these projects in 2021.
Residential Residential Commercial Commercial Commercial
Land Finance Land Finance
Development Development for Development, Development, Development,
with Planning without Planning
for Sale Hold & Rent fully pre-let part pre-let speculative
Alternative Lender 38% 38% 8% 0% 31% 23% 8%
Peer to Peer Lender 60% 40% 40% 40% 20% 0% 0%
Debt Fund 58% 67% 58% 33% 50% 50% 50%
Asian Bank 25% 25% 25% 0% 50% 25% 25%
Hedge Fund 67% 67% 0% 0% 67% 67% 67%
UK Bank 50% 50% 10% 10% 40% 10% 10%
Middle Eastern Bank 100% 100% 50% 50% 100% 50% 50%
Insurance Company 43% 43% 14% 0% 29% 29% 29%
European Bank 33% 67% 0% 0% 33% 33% 33%
North American Bank 0% 50% 0% 0% 100% 100% 100%
Pfandbrief bank 0% 100% 0% 0% 100% 100% 50%
Pension fund 0% 0% 33% 0% 0% 0% 0%
The chart above shows the proportion of lenders in each category – No lending appetite
which fund various development loan types.
Market Trend Analysis 11AVAILABILITY
- SECTOR &
GEOGRAPHY
There has been a noticeable drop in availability of loans
BUY
generally across all but one sector, but those sectors most
severely impacted by the Covid pandemic have seen appetite
to lend dry up the most. Availability of loans has fallen most Residential
significantly in the retail, hotel and leisure sectors. (Build to Rent)
We note that 2021 seems likely to see much larger declines in
investment loans in these sectors than in development loans. The
lead times on development projects naturally mean the asset
under construction will not earn rental income until it is completed.
The fact that activity is holding up better in this segment suggests
lenders are more confident about a robust market recovery in 1-2
years time than they are about the current market - especially in
HOLD
Prime Office
with regards to valuation and income stability in the short term.
Industrial/Logistics
In the case of retail, the pandemic has only exacerbated Tourist Hotels
the decline we have seen over the last 4-5 years.
Industrial and logistics remain very popular with lenders. Loan
availability here continues its upward trend, the only sector to see
SELL
an uptick in 2021 compared to 2020. With the shift to online retail
showing no signs of slowing down, we can only expect the logistics
sector to expand further, and for traditional retail to decline. Retail
The office sector has seen a modest decline in popularity. The
decline has been less severe than the possible persistence
of home-working post-pandemic might suggest. Although
we think lenders are open to this sector, we hear anecdotally
that they are cherry-picking the best office deals.
Sector preference Year on Year
Investment Development
90 80
80
70
Proportion of respondents (%)
70
60
60
50
50
40
40
30
30
20 20
10 10
0 0
OFFICE
INDUSTRIAL
/LOGISTICS
RESIDENTIAL
STUDENT
HOUSING
HOTEL
RETAIL
HEALTHCARE
LEISURE
OFFICE
INDUSTRIAL/
LOGISTICS
BUILD TO SELL
BUILD TO HOLD
STUDENT
HOUSING
HOTEL
RETAIL
HEALTHCARE
LEISURE
RESIDENTIAL,
RESIDENTIAL,
2021 2020 2019 2018 2021 2020 2019 2018
12The most popular regions among lenders for the
third year in a row are London, the South East and
the South West which has been modestly rising
Scotland 78%
over the last few years. The Midlands has seen a
marginal decline in popularity which now sits in
Northern
fourth place behind the South West. Ireland
48%
North 88%
Midlands 90%
Wales 76%
South East 92%
London 98%
South West
92%
Central London 98%
South East 92%
South West 92%
Midlands 90%
Lenders are more interested in Europe in 2021 than
North 88%
they were in 2020. There has been an average increase
Wales 76%
of seven percentage points- across the regions, with all
Scotland 78%
jurisdictions attracting more interest. This may reflect
Northern Ireland 48%
an increase in flexibility in lenders’ investor bases,
perhaps being open to new areas geographically in
order to have greater access to the best transactions
on the market, especially post Brexit. Nordics 34%
Ireland is registering the biggest surge in appetite
with a 14% increase taking it ahead of Western Europe Baltics 8%
as the most popular non-UK European location. The
strength of ties between the UK and Ireland makes it a
natural first port of call for UK-based lenders looking to Ireland 50%
diversify away from the domestic market.
CEE 18%
West Europe 48%
South Europe 22%
Market Trend Analysis 13LOAN MATURITY
& TICKET SIZE
For investment loans, we continue to see greater preference for longer-term maturities than was seen between 2017 and
2019. The largest drop in loan maturity availability for this year was in the medium-dated 6-7 category. Loan availability
nevertheless remained greatest at the medium maturities, but it’s clear that this category has borne the brunt of the general
decline in loan availability this year.
Loan Maturity - Investment Loans
70%
60%
50%
Percentage of Respondents
40%
30%
20%
10%
0
0-2 YEARS 3-5 YEARS 6-7 YEARS 8-10 YEARS 10+ YEARS
2021 2020 2019 2018 2017
For the first time in five years we are seeing a slight Average Maximum Ticket Size
divergence in the maximum ticket size for investment
and development loans. Appetite for larger ticket
250
investment loans appears to have increased in
2021, in contrast to a decline in appetite for large
200
development loans. The increase in ticket size for
investment loans indicates a more optimistic view for
150
investment, especially those in sectors which have now
demonstrated themselves to be resilient to the events 100
of the last 12 months.
50
The average maximum loan size for development
loans has fallen a bit. This is not because big-ticket
0
lenders are cutting back, but rather because low and 2017 2018 2019 2020 2021
mid-market operators have in some cases cut back
on the size of development loans they are offering, so INVESTMENT DEVELOPMENT
their caution has pulled the average down.
14Ticket size (£m) Ticket size (£m)
0
200
400
600
800
1000
0
200
400
600
800
1000
ALTERNATIVE ALTERNATIVE
LENDER LENDER
Market Trend Analysis
ASIAN BANK ASIAN BANK
DEBT FUND DEBT FUND
EUROPEAN EUROPEAN
BANK BANK
HEDGE FUND HEDGE FUND
INSURANCE INSURANCE
COMPANY COMPANY
each lender category, for investment and development loans.
MIDDLE MIDDLE
EASTERN EASTERN
BANK BANK
Maximum Investment Loan Ticket Size by Lender Category
NORTH NORTH
AMERICAN AMERICAN
Maximum Development Loan Ticket Size by Lender Category
BANK BANK
PEER TO PEER PEER TO PEER
LENDER LENDER
PENSION FUND PENSION FUND
PFANDBRIEF PFANDBRIEF
BANK BANK
The bars on the graphs below represent the largest, smallest and median maximum ticket size seen within
UK BANK UK BANK
15About Us Methodology
The Real Estate Finance division of BCMGlobal The research is based on the collection of primary
can source, secure and structure finance for data over the first month of 2021. The anonymous
investors and developers. Connected with almost open market survey was sent out publicly,
every major real estate lending institution active resulting in a data set of 68 respondents from
in Europe, we aid our clients in establishing long 61 separate lenders active in the UK Real Estate
term relationships with the most suitable lenders Lending market.
on optimal financing terms. Using an established,
targeted process we help to move transactions
along quickly and efficiently providing end-to-
end assistance. Link Group is a global expert in
providing efficient administration and innovative
financial solutions. We have over €80bn of
assets under management and over 112,000 loans
under management
Contact us
Tim Schuy David Tearne Natalie King
Head of Real Estate Finance Senior Analyst Executive Assistant
+44 (0)207 397 4595 +44 (0) 207 204 7901 +44 (0)207 204 7940
+44 (0)793 551 3855 +44 (0) 7849 624 209 +44 (0)754 758 5265
tim.schuy@bcmglobal.com david.tearne@bcmglobal.com natalie.king@bcmglobal.com
BCM0261_04/21You can also read
