• Lending returns to UK

Big lenders are coming back into the UK market as confidence of a commercial property revival gathers pace.

Research published last week by Savills shows a marked turnaround in attitudes among lenders since March of this year when it conducted a similar study.

Savills says the positive shift comes as some stability returns to the finance markets and the gap between the bank base rate and LIBOR (London Inter-Bank Offered Rate) narrows. At the end of last year the gap between the two reached a high of 160 basis points (bps) but has now fallen back to around 20bps.

In addition, the gap between average property yields and the bank's own cost of funding has never been greater, reckons Savills. This  means the banks' investments look secure and profitable once more.

Despite fears that lenders would be focusing on domestic markets, there is considerable appetite from banks outside the UK. German banks, for example, dominate the lender's list – accounting for nearly half of the 23 banks who said they would lend at least £20m.

And back in March Savills could find no banks willing to go to £100m or above. Now it says there are half a dozen. It does warn, however, that lending policies remain cautious and that there are no significant new lenders looking to come to market.

The industry's more positive outlook and lending relaxation is echoed by latest Savills statistics that show August and September were two of the strongest months for commercial development since 2007. 

In August around 21% of firms reported an increase in overall commercial activity. By September this figure had risen to 29%. And the Savills Total Commercial Activity Index saw a month-on-month increase – rising by +7.8% in August and +11.6% in September.

Savills reported that companies were anticipating an increase in market demand in the final months of 2009 with developers most optimistic about the industrial/warehouse sector and least confident in office activity.

Refurbishments and office fit-out net balances both showed marked rises of +15.6% and +14.1% respectively. Matt Oakley, head of Savills research said this reflected both the tentative market recovery but also the continuing delicate state of bankers' confidence: "Both of these tend to be the first sectors to recover from the downturn and rely less on bankers' cautionary stance regarding development. The evolution of the development market over the next 12 months will depend heavily on both bankers' and politicians' decisions."

Lenders are certainly still cautious and good quality property is scarce. These facts are backed by comments from CB Richard Ellis reported on the FT's website last week.

CBRE's executive director Robin Hubbard said a gap was opening between the recovery rate of ‘prime' property – for instance in central London, and ‘secondary' property in less fashionable town centres.

"Prime assets are tightening in a yield sense because of the level of demand and the fact that prime is the only thing you can get financing for at the moment," he was reported as saying.

He added that prime property values were being pushed up by investors wanting somewhere to put their cash and attracted to good sites with attractive yields. The UK was one of the few markets where foreign buyers were confident it had ‘bottomed' out and the favourable exchange rate meant they could buy more for their money.

But Hubbard was sceptical that the demand for prime property would spread to secondary any time soon. He said before the economic fallout, a lot of the UK bank lending was already against secondary, and sometimes tertiary, property – and circumstances for these was likely to get worse before it got better.


HA Perspective: There is good and bad news with this return to lending by banks. The good news is for the sellers of prime assets and the buyers of secondary assets.

Prime assets such as good quality upscale hotels in major cities have plenty of buyers chasing them and plenty of banks willing to lend, all be it on terms more like those available in 2003 than 2007.

So far in October Meridia Capital has paid $54m to buy the Four Seasons in Mexico City, which is 13.8 times 2009 EBITDA according to vendor Strategic Capital; Orient Express has sold the Windsor Court in New Orleans for $44.25m to the Berger company at 15 times 2007 EBITDA or 50 times 2008 EBITDA (which tells its own story about the decline in corporate travel); and Von Essen has bought the Forbury in Reading out of administration for about £10m.

The bad news is for less desirable properties. And it is here where some of the most leveraged portfolio deals look set for a sticky end.

The funds that have been set up to pounce on distressed assets will need to shift their focus towards these less desirable properties as there look to be few bargains at the trophy end of the market.

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