According to Jones Lang LaSalle, the latest Bank of England lending figures show that bank lending in sterling to real estate over Q3 2009 fell for the first time since December 1997.
Total lending dropped by £2.5 bln. to £244 bln. (including lending by building societies) compared to a £3bn growth last quarter. The year-on-year percentage change in real estate lending is trending significantly downwards, in a similar fashion to that seen in both periods from 1990 to 1991 and 2000 to 2001.
The figures highlight that new lending to real estate remains challenging with little more than a handful of banks truly active in the market for the most secure cash flows. Jones Lang LaSalle's forthcoming 'Lenders Expectations Survey' supports this.
While new lending to real estate remains fairly limited we expect lending to increase over the next two years, with minimal increase in loan to values (LTVs) and some reduction in margins. Many of the respondents to our Lenders Survey expect margins to tighten through greater competition, although these reductions are not expected to be substantial. The survey suggests that whilst margins on best prime investment will come down over the next 18 months from their current level of 200 250 bps, most lenders think it is unlikely that they will be below 150 bps before the end of 2011.
Jeremy Handley, Director in Jones Lang LaSalle's Valuation Advisory Group, commented: "The current supply and demand imbalance in the investment market is resulting in rapid compression of prime yields across all the major sectors in the UK. Given that the five year swaps rates are currently at 3.30% and margins are in the region of 225 basis points on best prime investment stock, it can be argued that current West End prime yields of 5.25%, for instance are challenging to justify on a geared purchase with any risk premium, although equity investors still find these levels attractive. In our view this will limit, but not prevent, yield compression going forward. It is a warning to the market on where pricing is going at the present time. This may lead to disparity in pricing between cash and debt-backed investors."
Barry Osilaja , Director in Jones Lang LaSalle Corporate Finance team, added: "Our survey also highlights that lenders expect to increase loan sizes over the next three years with 26% expecting £100m+ deals to be available at the end of 2010 and 43% at the end of 2011. We do not anticipate the sizes of loans to increase substantially until there is more activity in the secondary markets, through syndication and CMBS. This is not expected until early 2011 at the earliest."