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Cass Business SchoolCITY, UNIVERSITY OF LONDON
The Cass Commercial Real Estate Lending Survey
Mid-year 2018: the lending cycle - 10 years on from the GFC
Nicole Lux, Senior Research Fellow
Cass Business School
City, University of London
106 Bunhill Row, London EC1 8TZ
The Cass CRE Lending Survey is sponsored by:
Allen & Overy | Association of Property Lenders | Bank of England | GVA |
British Property Federation | Canada Life Ltd | Asset Services | CREFC Europe |
Fitch Ratings | GIC Real Estate | Helaba | JLL Corporate Finance Limited |
Chrestbridge | Savills | Royal Bank of Scotland
Cass Business SchoolCITY, UNIVERSITY OF LONDON
The Cass CRE Lending Survey – mid-year 2018
• The lending cycle – a retrospective
• Loan books, originations and lenders
• Underwriting – interest rates and margins, book LTV
Cass Business SchoolCITY, UNIVERSITY OF LONDON
70
80
90
100
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120
130
0
20
40
60
80
100
120
140
160
180
200
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017Ind
ex
ed
, A
vera
ge
19
99
–20
18
= 1
00
CRE Outstanding Loans RCA Transactions Volume MSCI Capital Value Index (r/h scale)
Deleveraged
Recovery
The lending cycle – loan books, a 20 year retrospective
Leveraged
Long Boom
Black
Leverage
The New
Normal?
Measured by outstanding loans, CRE lending has had only three states – up, down, and flat.
Through the long boom, capital values rose by 50%, loan books by 120%.
Through the deleveraged recovery, capital values rose by 27%, loan books fell by -35%.
It seems linkages between lending, market value and market activity are highly variable.
Mid 2018
£163 bn
Cass Business SchoolCITY, UNIVERSITY OF LONDON
The lending cycle – originations, a 20 year retrospective
70
80
90
100
110
120
130
0
50
100
150
200
250
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Ind
ex
ed
, A
vera
ge
19
99
–20
18
= 1
00
CRE Originations RCA Transactions Volume MSCI Capital Value Index (r/h scale)
Deleveraged
Recovery
Leveraged
Long Boom
Black
Leverage
The New
Normal?
Measured by origination volume, links between lending, value and trading are much clearer.
Loan books were cut back by write offs and debt sales; origination has tracked the recovery.
Over the full history, originations correlate at 0.82 with values, 0.60 with trading.
You may note that in from 2005 to 2007, origination and values looked decoupled from trading
Cass Business SchoolCITY, UNIVERSITY OF LONDON
The lending cycle - originations vs transactions volume
2000
20012002
2003
2004
2009
2010
20112012
2013
2014
2015
2016
2017
2018
2005
20062007
2008
£ Origination = £10.3 + 0.54 x £ TransactionsR² = 0.70
The fitted regression excludes 2005 – 2008 as outliers, or best forgotten.
0
10
20
30
40
50
60
70
80
90
0 20 40 60 80 100
CR
E O
rig
ina
tio
n £
bn
RCA Transactions Volume £ bn
Fairly static loan books
across a range of capital
values does not mean
lending is disconnected
from market conditions.
The chart plots loan
originations against
trading, and show a fairly
consistent linkage through
most years. All years since
2010 fall close to the
“predicted” origination
volumes.
Perhaps we can add a
drift in origination above
the levels indicated by
trading to the list of amber
to red signals for CRE
lenders.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
The lending cycle – % loan book in default by value
0%
5%
10%
15%
20%
25%
UK Banks & Blg Soc German Banks
US & Other International Insurance Companies
Other Non Bank Lenders Average
The end-product of misjudged
borrowing and lending through
the middle 2000s was a wave
of defaults.
Default here is defined as
payment beyond 90 days
overdue, covering £155 bn in
defaulted loans since 2006.
Across lenders, defaults varied
widely in both severity and
timing.
Our more detailed analysis
suggests the main factors
explaining variation in default
were the concentration of
originations in the mid-2000s,
plus loan book exposure to
developments and provincial
markets.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
The lenders – originations 1st half 2018 £ bn & % of total
-
10
20
30
40
50
60
70
80
90
UK Banks & Bld Soc Insurance Companies Other International Banks
German Banks Other Non-Bank Lenders North American Banks
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Loan origination was £22.5 bn in the first half of 2018 – 27% up on the same period last year.23
So the total for 2018 is likely to exceed the £45-£55 billion in each of the previous four years.
UK Banks share in origination ended a long decline in 2016, and has settled close to 50%.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
The lenders – originations as % of outstanding loans
0%
20%
40%
60%
80%
100%
120%
140%
2013 2014 2015 2016 2017 Mid 2018
UK Banks & Bld Soc Insurance Companies Other International Banks
German Banks Other Non-Bank Lenders North American Banks
Up to 2016, the most rapid book-building was by North American and Non-Bank lenders.
Who have remained the most active lenders, but at a distinctly slower pace.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
Collateral – originations 1st half 2018, £ bn & % by lender
0 5
North American Banks
UK Banks & Blg Soc
Insurance Companies
Other Non Bank Lenders
Other International Banks
German Banks
Central London Rest of SE West Midlands/Wales North Scotland Mixed
0% 50% 100%
46% of loans originated were secured by Central London assets – 75% for German lenders.
This compares with around 30% of RCA transactions, and 20% of MSCI Annual Index value.
The spreads show German lenders the least, North Americans the most, diversified.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
Collateral – origination 1st half 2018, £ bn & % by lender size
0 5 10
Small - Lessthan £500m
Medium -£0.5 to £1bn
Large over£5bn
Big £1 bn to£5bn
Central London Rest of SE west Midlands/Wales North Scotland Mixed
0% 50% 100%
The spread of lending also varies across lenders with different sizes of loan book.
The most diverse lending patterns appear at the extremes of the large and small lenders.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
Underwriting – average target lending margins bps
2008 2010 2012 2014 2016 Mid2018
Secondary
Office
Retail
Industrial
150
200
250
300
350
400
2008 2010 2012 2014 2016 Mid2018
Prime
10 year
average
.
10 year
average
.
Lending margins on prime assets have moved little since 2016, at 10 year lows.
On secondary assets spreads across sectors have almost disappeared, as retail margins
continue to drift out.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
Underwriting – lending and borrowing rates vs yields %
0
1
2
3
4
5
6
7
8
9
10
Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018
Borrower CostMSCI Average Initial Yield
MSCI Highest Quartile Initial Yield
MSCI Lowest Quartile Initial Yield
3 month LIBOR 5 Year Swap
Lender Interest
LIBOR rates, tracked by Swap rates with static spreads, have moved out since late 2017.
Against a small fall in market yields, so the 130 bps margin between borrower’s cost and
average yield is still below the 150 bps average for the last six years.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
Book quality - % of outstanding loans by current LTV
0% 20% 40% 60% 80% 100%
North American Banks
Insurance Companies
UK Banks & Blg Soc
German Banks
Other International Banks
Other Non Bank Lenders
Large over £5bn
Small - Less than £500m
Big £1 bn to £5bn
Medium - £0.5 to £1bn
All Lenders
% by value of outstanding loans
<50% 50% - <60% 60% - <70%
70% - < 85% 85% - <100% 100% - <120%
Loans at
Current LTV of:
Cass Business SchoolCITY, UNIVERSITY OF LONDON
Respondent views on main risks ... % of responses
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
PropertyFundamentals
Brexit Interest RateRise
Regulatory Risk
Very Concerned
Concerned
Mildly Concerned
Not Concerned
Cass Business SchoolCITY, UNIVERSITY OF LONDON
Summary
• The Lending Survey tracks 20 years of market history.
• New originations £22.5 bn in the first half, take loan books to £163 bn.
• Originations 27% up on 2017 H1 likely total for 2018 in line with recent years.
• A new normal? - lender mix, target markets fit the pattern of last three years.
• Prime lending margins push below 10 year lows.
• Secondary margins remain higher, with no spread across sectors.
• Book LTV and ICR varies, small / medium / new lenders on weaker figures.
• Lender worries: Brexit of course, market cycle, interest rate drift.
Cass Business SchoolCITY, UNIVERSITY OF LONDON
With thanks to the Cass CRE Lending Survey sponsors:
Cass Business SchoolCITY, UNIVERSITY OF LONDON
Additional information
• The full report & data are available for purchase from Cass Business School
− from this link
• More about Cass Business School real estate research & consulting
− from this link
• Or contact [email protected]