6th May 2020
CoStar Review: Lenders up UK real estate loan pricing due to Covid-19 risk
Real estate lenders have increased pricing for new loans due to the inherent risk caused by the Coronavirus pandemic, although most debt providers have kept pricing unchanged for deals in the pipeline pre-crisis, according to sources canvassed by CoStar News.
“There’s definitely been an uptick in pricing,” Adam Buchler, co-founder of debt advisor BBS Capital, said. “It’s difficult to pinpoint what it is but I would estimate the increase is in the range of 50-150bps. However, from our experience, it would seem that where possible lenders would prefer to take on less risk and limit leverage than look to push the pricing.”
JLL’s Edward Daubeney, who heads the EMEA debt advisory unit for the consultancy firm, agreed that pricing has moved upwards for transactions just launching amid the crisis.
“For core assets, this is in the region of 30-60bps and for value add or re-positioning projects, this is more like 150-200bps. It’s too early to say whether this will be the market norm or whether pricing will move back to pre-Covid. Historically, we have seen a reversion to the baseline over time once the catalyst settles down – in this case corporate spreads have had an impact,” he said.
Daubeney noted most lenders have held pricing for loans in legal documentation, which implies they were in the pipeline before the virus outbreak, although he has heard of a couple of instances where pricing was adjusted slightly upwards.
“We have closed transactions in the last couple of weeks with no pricing adjustments, which is a credit to those lenders. We also have several transactions in closing, with the main problem being timing and the logistics of completing due diligence – for example, valuations with the issue of physical inspection,” he explained.
In Daubeney’s view, pricing for new loans launching during the Covid-19 pandemic has gone up across the whole spectrum of lenders – especially the ones who were manufacturing returns through credit lines. These credit lines have either been withdrawn or re-priced, so overall pricing has to rise, he said. The least impacted in terms of loan pricing are debt funds without leverage and insurance companies – balance sheet lenders generally – who can adjust returns depending on their risk appetite, he explained.
For James Wright, head of real estate finance at Link Group, it is difficult to determine which lenders are set to increase loan pricing the most, as the longer term impact is still unclear. “The only consistency I can see now among a lender group is in the high street clearing banks which have effectively ceased lending for new-to-bank borrowers against real estate assets,” he added.
BBS’s Buchler agreed: “The clearing banks are struggling to look at new to bank business right now. Internally, resources have been directed towards either managing their existing clients or administering the government-backed support schemes that have come out in response to Covid-19. It’s very difficult for them to justify diverting resource away from that, which makes taking on new clients a real challenge.”
CoStar News understands some clearing banks like Royal Bank of Scotland are prioritising the support of borrowers with existing facilities, while delivering additional support to them through the available government schemes. Other clearers like Lloyds Bank are understood to be working on some new opportunities with new clients at the moment, although there is little new business activity across the sector as sponsors evaluate the impact of Covid-19.
In this line, a HSBC UK spokesperson said: “Our priority right now is to support our existing customers during this unprecedented time and help them access the finance they need to navigate the disruption.”
He added: “While our focus is on businesses we have an existing relationship with, we’ll look to support new to bank customers where we can on a case by case basis.”
Meanwhile, the non-banking sector – debt funds, insurance companies and the challenger banks – are saying on the whole that they are open for new lending, BBS’s Buchler said. “We’ve got evidence of this, as we’ve received terms from such lenders in recent weeks on a number of new projects,” he noted.
“Some non-bank lenders however aren’t open for new business, particularly those with liquidity or funding issues. Those that are open are taking a more cautious approach.
Leverage is generally down and pricing is moving up. From their perspective, it’s an opportunity to earn higher risk adjusted returns from a rebased market,” Buchler added.