Debt Market Snapshot

The banking market has largely seen a continued shift away from consumer focussed assets; in particular to sectors that have been less impacted by Covid-19, specifically residential investment and logistics/warehousing.

Across the board, an increase in Risk Weighted Assets and re-evaluation of risk ratings has driven increased banking conservatism, with a noticeable flight to high quality, core assets, at a maximum 50% LTV and mainly for existing clients. There are of-course exceptions but, anecdotally, there seems to be a general migration of lower-rated loans (both new originations and refinancings) from banks to the alternate lenders. Despite this, a funding gap is likely to persist.

A report by AEW has estimated the UK debt funding gap will reach £30bn over the three years to 2023, with half of the outstanding loans being in the retail sector. This is the result, not only of restricted appetite from traditional lenders, but also the falling asset values seen in retail (£9.5bn) and alternative assets (£13.5bn) such as care homes and hotels.

The alternate lending market will continue to grow to meet the surplus demand. The latest INREV report found that debt funds raised a record €32bn in 2020 for global real estate with returns for these funds averaging 7.7%, illustrating the profile of deals these funds will compete on. A second report from AEW has estimated non-bank lenders will account for 40% of commercial real estate new loan origination in Europe over the next 2 years. While this was a trend seen pre-Covid-19, it has certainly been accelerated as a result of the pandemic.

For existing loans, where covenants have been waived and/or maturities extended, it is likely that lenders will be less willing to extend forbearance, especially as moratoriums are lifted, giving landlords a greater deal of control over asset performance. The approach is likely to differ depending on the sector, with wholesale forced sales unlikely and lenders cooperating with sponsors where possible. However, there is an acceptance that a long-term solution will need to be found that reflects the viability of the assets in question. Where asset values have fallen this will mean either paying down the loan or re-pricing to reflect higher leverage.

It is worth noting that the trend of short term maturity extensions in 2020 will likely result in a ‘bottleneck’ of refinancings in 2021/2022.

The successful roll out of the vaccination programme has so far led to a positive shift in market sentiment and a general increase in market activity. While there is limited data for 2021 yet, JLL reported £19.4bn was invested in UK real estate in Q4 of 2020, a 6% increase from the previous year and making up over 45% of annual investment. With roll out of the vaccine appearing relatively successful in the UK compared to other countries, this may filter through to increased transactions, particularly from overseas investors. However, it may be that we do not see the real impact until later in the year.

The residential and industrial markets continue to perform well, and yields remain tight. We have also seen multiple sale and leaseback (S&L) transactions come to market as operating businesses look to raise equity. Savills recently reported that the second half 2021 is expected to see a record number of S&L transactions across Europe, fuelled mainly by logistics occupiers taking advantage of low yields. These transactions can be attractive to lenders looking for long-term stable income, however we have seen this is dependent on the tenant’s credit rating and lease length.