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Battling U.k. Property Lenders Cut Margins To 6-Year Low

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Bloomberg 15/12/14

'Lenders that spent six years recovering from soured commercial property loans have decided it’s time to sweeten their offers to the industry.

Banks, insurers and debt funds have cut margins for loans backed by the best offices and malls to as low as 1.25 percent, the least since 2008, according to broker Cushman & Wakefield. They’re battling for a share of a market where lender numbers have swelled and investors are flush with cash.

“It’s very competitive,” David Paine, head of global real estate at Standard Life Investments, said at an event in London this month. “There’s an awful lot of players in the market and margins have compressed over the last three to six months quite materially.”

New lenders flooded into the U.K. commercial property market in the years when banks were held back by writedowns and losses suffered in the wake of the financial crisis. More than 200 companies lend against U.K. real estate or plan to, the highest number in two decades, according to Savills Plc. (SVS) As a result, there’s now about 75 billion pounds ($118 billion) of credit available and only 40 billion pounds of demand, the broker estimated.

Investors are seeking to spend their cash before taking on more debt, said Emma Huepfl, co-founder of London-based mortgage firm Laxfield Capital Ltd. They’re also reluctant to take on high levels of borrowing because of lessons learned from the financial crisis and the commercial property crash that followed it.

Crisis Hangover

“Those memories are still strong,” Huepfl said in a Dec. 9 interview. “Institutional borrowers in particular have completely re-evaluated their approach to borrowing since the financial crisis.”

Lenders cut their average margin on the best quality income-producing London properties to 1.25 percent in the third quarter from 1.5 percent in the first half, Cushman & Wakefield estimates. That’s the lowest since the first half of 2008, based on a 50 percent loan-to-value ratio.

The average margin for loans secured by prime office buildings across the U.K. fell to 227 basis points in June from 335 basis points two years previously, according to a De Montfort University survey of 81 lenders published Dec. 12. During the first six months of this year, 89 percent of the lenders cut their margins for commercial property, the study shows.

German lenders offer the lowest margins in the market for prime office buildings at 169 basis points, followed by North American banks at 217 basis points, the report said.

Tempting Borrowers

There are signs that the cheaper credit are beginning to attract borrowers. There was 19.6 billion pounds of new lending and refinancing in the first half compared with 13.4 billion pounds in the same period in 2013, according to the De Montfort survey.

Commercial property loans will be the biggest factor affecting demand for bank lending in the fourth quarter, the Bank of England said in its quarterly Credit Conditions Survey published Oct. 7. They were second only to mergers and acquisitions in the third quarter.

Some of those who refinanced loans from 2009 through 2011 are again asking lenders for credit, Laxfield said in a Nov. 17 report.

“Borrowers are coming back and taking advantage of more favorable terms on offer,” Huepfl said. Lenders want to provide larger loans “in complete contrast to 2010, when to get a very large deal done you might have had to corral a syndicate.”

Returns Jump

U.K. commercial property gave landlords total return, a combination of rental income and changes in value, of 20 percent in the 12 months through November compared with 8.7 percent a year earlier, according to Investment Property Databank Ltd. The availability of credit is allowing buyers to bid more for assets. That contributed to U.K. commercial property yields falling to 5 percent in October, the lowest since September 2007, according to Cushman & Wakefield.

“Buying power is still being boosted by the improving availability of finance, with high competition keeping lending margins under pressure, particularly at the prime end of the market,” the New York-based firm wrote in a Nov. 28 report.

Lender Appetite

Great Portland Estates Plc (GPOR), a real estate investment trust focused on central London, is among the landlords that took advantage of the lower margins. The company obtained a 450 million-pound credit line in October with a headline margin of 105 basis points, the lowest paid by a U.K. REIT since 2007, Chief Executive Officer Toby Courtauld estimated.

The loan, provided by seven banks including Wells Fargo & Co., Banco Santander SA and Royal Bank of Scotland Group Plc, replaced two facilities. One of them had a 175 basis-point margin over Libor, the benchmark used for more than an estimated $300 trillion of securities.

“That’s a sign of the interest and appetite these guys have got for good quality businesses,” Courtauld said in a Nov. 13 interview.'

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This - margin reduction by lenders on their loans - strikes me as quite a likely middle term outcome for residential lending too.

Base rates will probably increase by 2016, but it doesn't follow IMO that retail mortgage rates must go up too.

At the moment, the Bank rate is 0.5% and you can borrow at that plus 2.5% (i.e. a 500% markup for the bank) without even trying. If we see base rates go to 1.5%, it seems plausible to me that mortgage rates could go down, as banks try to find people prepared to take on secured debt in a climate of rising base rates. There is plenty of room in banks' landing margins to allow them to do this. In 1998 - 1990 there were plenty of lenders who did not pass on 15% base rates to their customers, presumably because they feared bankrupting them and thus, er, not having any customers.

I suspect the next marketwide move in mortgage rates will be down, even there is a base rate move up.

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This - margin reduction by lenders on their loans - strikes me as quite a likely middle term outcome for residential lending too.

Base rates will probably increase by 2016, but it doesn't follow IMO that retail mortgage rates must go up too.

At the moment, the Bank rate is 0.5% and you can borrow at that plus 2.5% (i.e. a 500% markup for the bank) without even trying. If we see base rates go to 1.5%, it seems plausible to me that mortgage rates could go down, as banks try to find people prepared to take on secured debt in a climate of rising base rates. There is plenty of room in banks' landing margins to allow them to do this. In 1998 - 1990 there were plenty of lenders who did not pass on 15% base rates to their customers, presumably because they feared bankrupting them and thus, er, not having any customers.

I suspect the next marketwide move in mortgage rates will be down, even there is a base rate move up.

It's not quite like that tas you have to factor in the default rate, which is low at present.

Just to add - The rish for lenders has not gone away, it's just been masked by centeral banks low interest rates.

Edited by Wurzel Of Highbridge

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'As a result, there’s now about 75 billion pounds ($118 billion) of credit available and only 40 billion pounds of demand, the broker estimated.'

This - margin reduction by lenders on their loans - strikes me as quite a likely middle term outcome for residential lending too.

Base rates will probably increase by 2016, but it doesn't follow IMO that retail mortgage rates must go up too.

I suspect the next marketwide move in mortgage rates will be down, even there is a base rate move up.

It's the Mish Shedlock line-lack of credit worthy borrowers/lack of demand.

Same result for residential in time I'd have thought.

Monetary policy pushing on a string.

Quite how RBS is going to get back to health in these cricumstances I don't know.

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My wider point is that at the moment banks are risk averse and have no special interest in offering mortgage finance at attractive rates. They can demand low LTVs and load up a huge ultra-low-risk margin relative to their own cost.

To lend at 3% against a base of 2.5 is far nicer business than lending at 10 while borrowing at 7.5. Same spread, enormously higher margin.

In the late 80s, they had to absorb a lot of the interest rate increases from 6 to 15%. It was all very well base rates going up to 15%, but nobody would borrow at 17.5. So they loaned at 15.1 and whatnot.

I can see the same thing happening again. Base rates up, mortgage rates down. Politically very popular too.

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