LENDERS are pessimistic on the prospects for UK commercial property values, with three-quarters expecting prices to fall this year, new research has found.
The research comes from Link Asset Services’ Real Estate Market Trend Analysis, which surveys UK lenders to assess their sentiment on the property sector.
It also found that only eight per cent of respondents expect UK commercial property prices to rise this year, with most predicting a drop of around 2.5 per cent. The outlook for residential property was equally muted, with 61 per cent of lenders predicting falling values, reinforcing the forecast of negative house price growth by the Office for Budget Responsibility in the recent Spring Statement.
Political uncertainty was one of the main factors weighing on lender confidence in commercial real estate, notably Brexit, with more than half of respondents highlighting it as a concern.
Their worries are being reflected in lower lending growth, the report said. The number expecting loan volumes to increase fell by 18 per cent compared to 2018, and the number expecting to increase the size of their origination teams fell by 10 per cent.
Loan-to-values have also fallen by a modest two per cent since 2018, reflecting concerns over elevated risk, while pricing on higher-risk categories of lending has continued to rise.
The report also demonstrates that lenders are focusing on their core market sectors and regions – a further sign of caution.
Lenders are looking for bigger ticket purchases to finance and some of the best loan pricing is only available on these more significant transactions. The maximum loan amount has increased exponentially for investment loans from an average of £134m in 2017, to £154m in 2018 and up to £226m in 2019. Lenders are more keen to offer long-term loans of 10 years or more, although demand is still concentrated more in the three- to five-year segment.
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“Confidence has turned to caution at the start of 2019,” said James Wright, head of real estate finance at Link Asset Services. ‘Brexit has already weighed heavily on UK real estate market, and political risk is by far lenders’ largest concern. We are seeing many taking a far more cautious approach as a result, with fewer expecting to do more business, and many falling back into their core markets and products.
“It looks like, in the next 12 months, we’ll see lenders take a ‘softly, softly’ approach until there is greater clarity around the UK’s relationship with the EU, and economic and political fears calm.”