Property lending survey 1998

Citation

Isaac, D. (1998), "Property lending survey 1998", Journal of Property Valuation and Investment, Vol. 16 No. 5. https://doi.org/10.1108/jpvi.1998.11216eab.002

Property lending survey 1998

Property lending survey 1998

Keywords Development finance, Mezzanine financing, Monetary policy, Property portfolios

Introduction

The latest Property Lending Survey, the eighth since 1990, reflects a market that is becoming more polarised between those prepared to lend on investments and those willing to lend on developments.

Particularly notable is the renewed interest in speculative property among those already committed to development finance. Thus the number who reacted positively to development lending fell from 48 per cent in 1996 to 39 per cent, but a substantial 58 per cent of the latter were prepared to lend on speculative projects. Investment lending, by comparison, was acceptable to 93 per cent of respondents, although those involved in owner-occupied property dipped slightly.

Despite the overall lack of enthusiasm for funding developments, the proportion of development property in the average loan book had nevertheless increased. The average size of loan book had also grown, reflecting greater market activity by the larger UK and European lenders.

The University of Greenwich/Chesterton property lending survey found that the average size of property loan book was £463 million, up from £450 million in 1996. There were a number of large lenders in the market and the maximum loan book was £2.5 billion, albeit this compares with the largest book of £5.5 billion in the 1996 survey.

A record proportion of respondents expected to increase their loan books this year, up to 84 per cent. This shows a small rise on the 80 per cent recorded in 1996, but is indicative of a general recovery, particularly when combined with the predicted level of increase which averaged £126 million among those who responded to this question. This shows a substantial uplift on the £84 million reported 18 months earlier and reflects the intentions of a number of aggressive European banks. The level of response was again encouraging given the paucity of information from some lenders in previous years.

Summary of results

The survey was carried out at the end of 1997, which was later than in 1996 when it was undertaken in June. A total of 49 banks and financial institutions responded to the questionnaire (65 in 1996), of which 48 per cent were UK banks, 20 per cent European, 9 per cent Japanese, 9 per cent North American, 4 per cent Middle Eastern and 1 per cent Far Eastern (excluding Japan) with the remainder accounted for by "others".

Respondents to the survey will tend to have a greater interest in property lending and thus the results may tend to be more positive than the market generally. The questionnaire had been redesigned to provide more detail in the critical areas of lending policy.

The average split of property portfolios in the loan books was 26 per cent development and 74 per cent investment. This is the highest percentage recorded for development loans since 1992, reflecting increased development activity and confidence in the property market after reaching a low point of 12-13 per cent between 1994 and 1996 (see Figure 1).

Banks and financial institutions' optimism about property lending had levelled off. Only 19 per cent were more positive about property lending than they were six months earlier and, although this is a slight increase on the 15 per cent recorded in 1996, it falls far short of the 52 per cent who responded positively in 1994. Among the topical issues explored by the survey were the impact on property lending of a Labour government and an independent monetary policy for the Bank of England. Most respondents viewed the former as having little effect and the latter as a good move. However, reaction to the private finance initiative was more mixed, with fewer banks and financial institutions considering investing in such projects but a larger proportion expecting to do so in the future.

Investment

Most lending institutions still appeared keen to provide funds for good quality investment property which, at 93 per cent, is consistent with the 1996 figure (94 per cent) and broadly comparable with previous years. The proportion lending to owner-occupiers had fallen to 62 per cent from 76 per cent, although this figure has fluctuated in previous years and has dipped to as low as 48 per cent (in 1992).

The maximum lending term for investment loans ranged from one to 30 years with an average of 14 years. Respondents were prepared to lend an average of 78 per cent of value, up from 77 per cent and the highest proportion recorded to date. They had also increased their average maximum advance from £11 million to £17 million, returning to the 1995 level but still some way off the £25 million maximum in 1992.

Figure 1.Composition of property portfolio

Borrowers had to pay an average of 1.6 per cent over the base rate or LIBOR, lower than the 2.1 per cent average quoted in 1996 and 2 per cent in 1995. Bridging loans were available from 38 per cent of the respondents ­ a return to the 1995 level after a brief dip ­ and most (86 per cent) would lend to single asset property companies (see Figure 2).

Development

Respondents continued to steer clear of development finance with only 39 per cent prepared to lend against this sector, a further decline after dropping to 48 per cent in 1996. In stark contrast, when the survey began in 1990, a clear majority (94 per cent) were prepared to provide development funds. However, among respondents who would finance developments, a higher proportion appeared willing to undertake speculative projects: 58 per cent compared with the 1996 total of 35 per cent. It should nevertheless be noted that this still represents only 24 per cent of active lenders in the survey, roughly in line with the figures of 28 per cent in 1996, 21 per cent in 1995 and 19 per cent in 1994, but a far cry from the 77 per cent who would provide funds for speculative development in 1990 (seeFigure 3).

Providing project finance on a limited recourse basis had become more acceptable to lenders: 47 per cent answered in the affirmative against 30 per cent in 1996, with a further 37 per cent rarely providing such finance. More than three-quarters (78 per cent) would capitalise interest during construction.

Figure 2.Margin over LIBOR

Figure 3.Proportion of lenders prepared to finance speculative development

The average minimum advance was £2.5 million and the average maximum was £14 million, consistent with the previous three years, while the highest advance was £80 million (£75 million). Respondents were prepared to provide a higher proportion of loan to construction cost ­ up to 83 per cent (78 per cent) ­ but ratios for land costs and completed projects had changed only slightly at 72 per cent and 74 per cent, respectively.

Commercial property found most favour among lenders but it is facing growing competition for funds from leisure and residential developments. It attracted 38 per cent of the votes for the most favoured lending sector (52 per cent in 1996), while leisure surged into joint second place with 26 per cent (12 per cent), equalled by residential. Mixed use developments accounted for the remaining 10 per cent.

Location

Locational preferences for investment and development property have not altered significantly since the last survey with most interest concentrated in central and outer London and the South East. The exception is mainland Europe which experienced its highest overall rating since 1990 ­ 10 per cent for development property and 6 per cent for investment property. This compares with 3 per cent and 1 per cent, respectively, in 1996 (see Table I).

It will be interesting to see whether this translates into overseas investment loans which on average accounted for only 23 per cent of lenders' total portfolios.

Future

When asked whether their views had changed, 19 per cent of the banks and financial institutions were more cautious about property lending than they had been six months earlier, which compares with just 7 per cent in 1996. But a higher proportion also expressed greater optimism, up from 15 per cent to 19 per cent, while 62 per cent said their views were unchanged.

None of the respondents professed to have changed their lending criteria in the previous six months. Yet, compared to the findings of the 1996 survey, cash flow from a property had taken on greater significance. It was mentioned by a quarter of the lenders against 17 per cent in 1996. Location was the second most mentioned criterion at 16 per cent (14 per cent), while the borrower's track record came in third with 14 per cent. In the previous survey, it was equal first with cashflow.

	Investment (%)	Development (%)
Central London	22	23
Outer London	20	19
South East	20	20
Rest of England	19	17
Scotland	13	11
Europe	6	10

Table I.Locational preferences for investment anddevelopment property

Looking ahead, 7 per cent of all respondents appeared ready to lend on speculative developments while a further 16 per cent would lend under certain conditions. However, 77 per cent would not lend on speculative property.

Topical issues

Few lenders were prepared to provide mezzanine funding, ranging from 10 per cent on owner-occupied property to 21 per cent on investments, with average target returns of 17.5 per cent and 24 per cent, respectively.

Among current issues, loan to value covenants in valuations were considered the most important, ahead of vacant possession values and the change of legislation relating to privity of contract. Indeed, 80 per cent thought that the privity of contract changes under the Landlord and Tenant Act 1995, had so far had only a limited impact on the investment market.

Just over half of the respondents (55 per cent) similarly thought the Labour government would have little effect on the property market. One in five said it would provide a positive boost while 12 per cent predicted a negative impact such as high costs.

A higher proportion were in favour of the Bank of England having an independent monetary policy: 63 per cent thought it was a good idea of which 21 per cent suggested that interest rates would be more predictable; only 13 per cent actively dissented.

Finally, most lenders (64 per cent) thought the change of government would have either a neutral or positive impact on the Private Finance Initiative (PFI), with a further third answering "don't know".

Compared with the last survey, fewer respondents were currently considering loans to a PFI project ­ 39 per cent against 63 per cent in 1996. But more would lend in the future, up to 67 per cent from 52 per cent. For 44 per cent of the lenders, this meant "within six months".

Of those who were prepared to lend to PFI projects, there was a general willingness to commit larger funds than previously. Just under a quarter (23 per cent) suggested £25 million to £100 million compared to 15 per cent in 1996, while a further 36 per cent opted for the £10-25 million range (26 per cent in 1996). At the extreme ends of the scale, 27 per cent would commit less than £5 million and just one lender would consider £100 million-plus.

Healthcare remained the most popular sector for PFI projects, climbing to 41 per cent from 28 per cent last time, with infrastructure also securing greater interest at 22 per cent (18 per cent). Government premises and education were the next most frequently mentioned sectors, trailed by defence projects at just 4 per cent.

Less than a third (30 per cent) of lenders would consider PFI projects outside the UK, broadly similar to the 1996 figure. Of these, Europe (EU) again came out top at 50 per cent, followed by Asia, 25 per cent, and Eastern Europe, 9 per cent.

For more information contact Adrian White at Chesterton, 54 Brook Street, London W1A 2BU. Tel: 0171 499 0404.

David IsaacUniversity of Greenwich, Dartford