Savills finds £350bn of debt exists and encourages new lenders to consider secondary property

Savills opened its annual financing property presentations today, 08 June 2011, in the City of London addressing lenders on the issue of a 'two-tier and two-speed market'.

View the Financing Property Presentation (.pdf)

The international real estate advisor revealed that £350bn of debt exists in the UK commercial property market, which is circa £100bn more than was previously estimated by industry experts.
 
Furthermore, the firm suggests that of this figure just 25% is allocated to prime, implying £250+bn is secured against secondary and tertiary property. Savills notes that for those in a position to lend, there are some ‘hidden gems’ in this market and secondary will be the area of opportunity in 2011/12.
 
Savills also confirmed that, whilst loan to value breaches and issues with existing loan books remain, having had two to three years to asses the situation, banks have taken stock and are able to take a more carefully considered view. The multi-tiers of the market have been accepted, enabling them to adopt a more rational approach to existing loan books, which are not holding back new lending ambitions.
 
Referring to De Montfort University research, Savills reports that £46bn of loans are due to mature this year but that lenders have already begun to address these loans. The firm finds that lease lengths are a vital determinant of extending current loans with an average of 2.2 year extensions agreed.  Savills suggests that loan to value ratios will continue to stick at 60-65% as lenders remain cautious and the impact of Basel III requires higher regulatory capital reserves. Savills notes that this will fuel the continued shift towards equity funding that is coming from UK institutions, sovereign funds and opportunity funds.
 
William Newsom, Savills UK head of valuation, says: "Debt availability continues to be an issue for this market and we have witnessed a reversion to the historical model of the 1950’s, 60's and 70's where higher levels of equity are required. However, the market is awash with equity including a new wave of mezzanine providers that can take advantage of low loan to value ratios in order to bridge the gap between senior debt and equity. For lenders, the increased equity in the market will provide good opportunities for deleveraging by up to 30% of the total loan book. This will involve properties being packaged into saleable portfolios that combine a compatible mix of assets. We do not expect the release of this stock to destabilise the market."
 
Top 16 active big ticket property lenders
Aareal                                Eurohypo   
Aviva                                 Heleba
Barclays Bank                     ING REF*
Bayern LB*                         Landesbank Berlin*
Deka Bank                          Met Life*
Deutsche Bank                    Royal Bank of Scotland
Deutsche Hypo*                  Santander
Deutsche Pfandbrief             Société Générále*
* new lenders to top list since June 2010
 
Savills suggests that prime is now correctly priced with a more realistic yield gap between prime and average secondary product of 280 bps.  The firm does however find that in some areas of the market, a further widening of yield gap between prime and secondary is necessary.  
   
Mat Oakley, head of commercial research at Savills, says: "While prime remains the supportable and popular choice, the scope for rental growth, opportunities to add value and reduced investor competition associated with secondary, mean that now is the time for the market to rediscover the joys of grade B product.  The new generation of lenders that are emerging are capable of rationalising the argument for London versus the rest of the country and this will encourage a further distinction in the market between prime, secondary and even tertiary stock."
 
In the residential markets, Savills research reported that, with a continued tight supply of mortgage finance, there is an abnormal equilibrium where broadly static UK average house prices are dictated by equity rich buyers against the context of low transaction numbers.
 
Lucian Cook, director of Savills residential research, comments: “The distribution of equity will dictate the shape of the housing market over the next five years.  This will lead to big differences between price movements and transaction levels in the equity rich markets of London and the South East and the mortgage dependent markets of the North. 
 
"Equally at a local level we expect the performance different sectors of the market to divide.  Grade A stock in primary locations will be the strongest magnet for the 83% of housing equity held by the over 45s. By contrast grade B and C stock in tertiary locations is likely to shift further into the private rented sector, with prices being constrained by the income yields demanded by investors."
 
For further information, please contact:
William Newsom, Savills Valuation, +44 (0) 20 7409 8780
Mat Oakley, Savills Commercial Research, +44 (0) 20 7409 8781
Lucian Cook, Savills Residential Research, +44 (0) 20 7016 3837
Victoria Buchanan, Savills press office, +44 (0) 20 7409 8940