Celebrating 20 years of the UK CRE debt lending survey

Twenty years of the Commercial Real Estate Debt Lending Survey was celebrated at Cass Business School on Wednesday 27^th February with presentations from Scope Ratings, Berenberg and Cass.  The presentations focused on market ‘irrationality and exuberance’ leading up to the last financial crisis (2003-8) and the aftermath.  Delegates also discussed what happens when regulators clamp down on bank lending and what effect this has on banking markets and the economy.

Dr Nicole Lux, Cass Business School, wrote the following summary about the event.

Key findings

• The CRE financing market has reached a new level of maturity, presenting itself as a low risk asset class when viewed by traditional risk measures such as LTV, ICR ratios
• The new risks are not coming from the financial sector but from new technologies and their interactions with rental markets, tenant demand, economic growth, etc
• New technology platforms offer debt lending outside the regulated space, traditional lenders find better loan structures optimising tight ROE targets
• There could be some serious disruption as banks need to switch from LIBOR to the new reference rate of SONIA

UK banking sector equipped for post-Brexit challenges

An evening of presentations and discussions across sectors at Cass Business School revealed that the UK banking sector is well equipped for any upcoming challenges related to Brexit and the economy. Regulatory controls have been successful in favouring prudent lending practices within the banking sector. With the banks out of the spotlight, the view goes to other lenders such as debt funds, insurers and pension funds as well as alternative lending platforms. Risk taking by some of these lenders has been increasing as indicated by rising mezzanine LTV levels and tightening debt yields.

However, most threads and disruption to the real estate sector are expected to come from the economy and new technology. With so many factors in our national economies linked globally, it is hard to predict the outcome in a local setting. There is a risk that the European economy is going to slow down, depending on a list of outcomes of global events such as trade agreements between China and the US, as well as national labour market reforms in France and Italy.

None of the participants saw imminent threats to the real estate lending industry in the UK and Europe, and the sector seems in a better place than prior to the GFC due to increased regulation and de-risking. The Lending Survey event made clear that another downturn will be witnessed within the next decade, but participants believed it will be less severe than we have seen in the past 20 years. The prediction is that the next crisis will stem from factors external to the lending industry.

The Lending Survey is also looking forward to continual improvement, and it announced an analytical tool for real estate debt benchmarking, due to be launched in June 2019 in cooperation between Cass Business School and CoStar. For our annual result announcement please register here.