Real estate finance lenders blindsided by COVID-19

Jessica Bird

April 8, 2020

In research undertaken by Link Group in the months prior to approximately one-fifth of the world’s population being out into lockdown, only 2% of real estate lenders felt a global pandemic was a significant risk.

For the majority (77%), Brexit posed the most pressing risk of impact on the real estate market for 2020, according to Link Group’s Market Trends Analysis.

Other risks to the UK real estate market included a global recession (11%), general political risk (6%), the Help to Buy reduction (2%) and a rental market decline (2%).

The research also found that more than a third of lenders in the UK were also able to provide loans in Western Europe and/or Ireland, while 97% were able to lend in the London market.

Appetite for commercial real estate loans surged across multiple investment sectors last year, indicating that lenders have broadened their capabilities.

The biggest surges were in the residential and student housing sectors, but office and industrial real estate also increased.

Only the retail sector showed a decline, in terms of loans for both investment and development.

The average maximum on single loans commercial real estate lenders were prepared to make has declined, in a reversal of the trend seen between 2017 and 2019, accompanied by a notable slowdown in the volume of very large transactions in the UK.

Debt terms shorter than five years decreased in preference, and loan terms in excess of five years increased, continuing a long-term trend.

James Wright, head of real estate finance at Link Group, said: “This year’s Market Trends Analysis shines a light on some key themes within the sector, but it also highlights the extent of uncertainty in real estate.

“This will now be exacerbated by uncertainty in the global macroeconomy.

“Looking beyond the current more challenging circumstances, clear changes in lenders’ preferences are visible: for example, in contrast to recent years, mezzanine debt became cheaper, with margins on these loans falling nearly 100 basis points year-on-year.

“Market players have been seeking yield in real estate debt and have subsequently shifted up their risk appetite in an attempt to capture it.”

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