Almost two months into the lockdown, we share our views on the outlook for the UK property lending market and the relationship between borrowers and lenders in the short to medium term.
If you are a commercial real estate non-manager owner or Buy-to-Let investor, you have probably been juggling with cash flow issues from unpaid and/or delayed rent from tenants and pressing mortgage commitments from lenders for a few weeks now. In addition to our sympathies, our message to you is two-fold:
1. Continue with that collaborative, open dialogue at both ends. The Coronavirus Act 2020 and the subsequent Government announcement on 23 April 2020 have not left much manoeuvre for action (whether tenants are genuinely unable to pay full rent or are taking the chance to withhold payment) and collaboration is proving to be the best and, in some cases, the only approach under the current circumstances (at least until 30 June 2020).
2. Although at a slightly higher pricing and moderately cautious leverage, the property lending market remains open for the right opportunities and a solution to your funding requirements may be found there.
If approved, the so called ‘furloughed space grant scheme’ will be a relief for many landlords but perhaps not a complete, long-term solution to their financial issues, when access to funding may well be.
The property lending market also remains open to both commercial real estate owner managers whose assets (retail, care homes, office buildings, student accommodation, hotels) are experiencing lower occupancy and/or take-up rates, and to real estate developers who have seen building developments put on hold, planning permissions being delayed or a slowdown in sales in existing developments. There may be a solution in the market for your funding needs too.
We talk to investors and lenders in the property market on a daily basis and these are our key takeaways from those conversations:
• Senior lenders are still focusing on supporting, and the majority are increasing lending to existing clients while avoiding new deals.
• Alternative lenders, challenger and private banks, and private debt funds, particularly those with healthy loan books, remain active and open to new opportunities. In addition to flexibility, availability of funding may downplay the relevance of their higher costs to borrowers.
• Limited leverage is a result of lenders looking to create a margin of safety against the obvious uncertainty laying ahead and the difficulty (both physical and conceptual) to value properties at present which is also resulting in lower valuations.
• Social distancing and remote working may also result in slightly slower funding approval processes, although procedures have adapted over the past few weeks and become more streamlined.
• Covenant-lite facilities may be a thing of the past, and we will probably see a more standard level of covenants with frequent reporting and a pandemic provision in the Force Majeure clause in facility agreements going forward.
• We don’t envision many properties changing hands in the short term, not because of lack of cash rich buyers (who are plenty) but due to seller and buyer price discrepancies. This will probably change when lenders start enforcing potential covenant breaches, bringing distressed opportunities (and forced sellers) into the market.
Whether you are a commercial real estate owner (manager or not), a Buy-to-Let investor or a real estate developer we will be able to help with your funding needs so please get in touch if you wish to discuss your case with us and see how we can assist.