Insights

Insights / 07 May 2020

Lending slowdown in 2019, increasing lending costs and defaults expected for 2020

The CASS Survey part sponsored by Crestbridge
  • New loan origination reached £43.3bn in 2019 – a 13% decline from 2018, in line with property investment volumes.
  • Significant increase in lending margins across secondary property types.
  • Increase in the absolute amount of defaulted loans y-o-y by 36%.

In 2015 the EBA expected EU banks to need €17.5bn of additional CET1 capital to comply with Basel IV by 2027, while the capital shortfall would be €39.7bn. Our estimations show that this will result in a minimum loan margin of 200bps and 250bps by 2027. A new analysis in the Cass commercial property lending report Year-end 2019 taking into account the current crisis results in further loan write-offs and debt losses for the most affect sector retail of £8-10bn. An additional £22bn of development loans are affected by construction delays, defaults of construction contracts, especially £14bn of residential development loans could also be facing lower sales unit prices, resulting in a partial loan write-off.

The effect of the corona virus crisis will be most felt by the already struggling retail sector, but also other sectors will be suffering such as hotels/leisure, student housing and residential investment property. While the change in capital treatment for loans struggling with interest payments due to the corona virus crisis will offer short-term relief, in the longer term some businesses will not recover and the losses of these loans will need to be reflected in banks’ balance sheets.

According to the Cass UK Commercial Real Estate Lending Report, new lending for 2019 already declined 13% year-on-year to £43.3bn. Against this Costar recorded £48bn of property transactions over the same period. Only 46% of new debt was used to finance property acquisitions, all other lending was due to refinancing. While property transaction are to be subdued in 2020, with an expected transaction volume of £34bn, lenders have £43bn of loans to refinance in 2020/21.

Outstanding development finance remained stable in 2019, but undrawn facilities had increased to £27bn in H1 2019 and remained high with £25.5bn, indicating some developments might have seen standstill. Lenders already mentioned in January 2020 that the corona crisis in China has led to supply issue of necessary building materials.

Also pricing of loans secured by London prime office property remains competitive, a first change is visible with an increase from 199bps to 205bps over 12 months. Larger increases can clearly be seen across secondary property loans ranging from 40 – 70bps, ending at above 300bps for all type of properties. However, interest rates have developed favourable during 2019 taking off some of the pressure. While there was no evidence after the crisis 2008/09 of lenders increasing lending costs to recover losses and write-off, the situation is now different. The underlying credit decline of loans triggers increased capital costs immediately and tighter underwriting will trigger higher lending margins.