Confidence is returning for lenders and real estate market participants with the emergence of a more positive UK economic outlook. Many subsectors such as industrial and residential are in a relatively healthy position, while others, like retail and offices, face challenges.
Meanwhile, some recent high-profile deals show overseas investors still have an appetite for UK real estate.
Despite reduced rent collection in sectors worst hit by government restrictions, we’ve seen a 95%-plus collection rate in the private rented sector and around 90% occupancy across our portfolio, and industrial and logistics performing strongly.
As businesses reopen, allowing for rent payment and helping to address built-up arrears, we don’t expect a flurry of evictions, but there is still uncertainty about the final stages of unlocking. The end of the eviction moratorium will involve a delicate balancing act as tenants and landlords look to agree future rent arrangements.
While UK-based non-performing loan deals fell significantly during the pandemic, loan origination volumes fell 23% in 2020, Bayes Business School research shows.
That said, there are signs of increasing loan origination activity that we expect to continue as the impact of structural changes across the sector plays out. From a debt market perspective, 2021 has been busy, with the high volume of client requests for amendments and extensions seen at the close of 2020 continuing into Q1 2021.
We’ve seen lower loan volumes since Easter as many clients have secured the flexibility they need, but extended loan arrangements will require refinancing in the next three years, driving up the base level of loan market activity.
More broadly, cash generation remains the sector’s key focus and anticipated sluggish rental growth is likely to limit debt capacity.
Despite a peak in volatility early in the pandemic, market conditions have improved for borrowers and normalised in well-performing sectors. With data supporting an improved economic outlook, credit sentiment has also improved.
The cost of funding loans to businesses is similar to pre-Covid, albeit sector dependent, thanks to a cut in public market financing costs driven by central bank stimuli. In sectors heavily affected by Covid, margins have widened to reflect the perceived higher risk, while pricing could tighten for larger, diversified corporates and in lower-risk sectors .
Loan pricing remains stable, with average senior loan-to-value (LTV) ratios broadly below 60% across the sector and mezzanine loans offering LTVs up to 75% where cashflows and outlook support it.
There is a strong demand for commercial mortgage-backed securities, with £2.1bn issued across six deals in the first quarter of 2021, compared with £2.8bn for the whole of 2020.
There is still uncertainty in the student accommodation, office and retail sectors, and credit sanctioners will closely focus on the fundamentals of lending requests.
Our research indicates that the Bank of England, the Fed and the European Central Bank are unlikely to adjust interest rates until after 2022, but the UK rate could change at the end of next year – possibly by 15 basis points to bring the base rate back to 0.25%.
The pound has performed well against the dollar and the euro, and we expect sterling to remain relatively stable for the rest of the year and strong against the euro due to the vaccine roll-out and a nimbler economy. Against the dollar, there will be more of a balancing act.
We are quietly confident about the longer-term outlook for the sector and associated debt finance landscape, but remain cautious in the near term as we wait to see how the anticipated economic bounce-back plays out.
Jason Constable is head of real estate UK at Barclays