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The report revealed that despite improved loan origination activity in the second half of 2020, the market lagged behind volumes reached in 2019, reaching just £33.6bn Underperforming loans rose sharply from 4.8% to 8.6% of outstanding loans.
The report also showed that loan-to-value (LTV) ratios reached a new historic low, averaging between 50% and 55%, coupled with extra amortisation and cash reserves. However, it found that margins rose across all property types by between 20 and 80 basis points (bps), apart from logistics. Prime office margins ended at 229bps up in December 2020.
There was considerable dislocation in lending markets in the first half of 2020 and the impact of lockdowns continued to slow market activity into the second half of the year.
Lending activity was dominated by loan extensions and refinancing, which accounted for 57% of all new lending.
Extensions — many of them short-term — have moved the maturity profile of loan books, with 56% of loans coming up to maturity between 2021 and 2023.
The report also found that while at least 40 to 50 lenders were actively lending in most prime property sectors, only 13 lenders considered lending against secondary retail, with just three lending against shopping centres.
The residential development pipeline remained high in 2020, especially for the private rental sector, with a total pipeline of £16.7bn. In total, 20% of lenders’ loan books are backed by some form of residential asset and 28% by office property.
Dr Nicole Lux, senior research fellow at the Business School and author of the report, said: “Loan book quality differs substantially across different lenders and it has become apparent that lenders with loan books up to £1bn have generally lent against assets of lower quality.
“We predict that real estate lending will become more expensive and require further capital for borrowers across the next two to five years, due to increasing maintenance and improvement requirements to meet ESG standards, necessary conversions or repurposing and increased capital costs of banks.”
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