Competition for prime UK RE assets pushes margins down

UK lenders have targeted prime property in Q1, which has had a knock-on effect on margins.

An increased appetite for prime lending has pushed margins down in the first quarter of 2017, according to a report from advisory firm CBRE.

CBRE figures show the margin figure stands at 2.3 percent, a drop from 2.4 percent recorded at the end of last year as greater competition is having an impact on returns. Also, the report found there was a reluctance to finance development projects or secondary and more riskier assets.

Commercial and residential real estate debt, however, still offers a healthy premium in contrast with UK government bonds. CBRE said gross returns in the first quarter were 2.9 percent, the highest since the end of 2014.

Senior CRE loans are offering returns of 3.3 percent, a slight dip of between 10 and 20 bps compared with the previous quarter said CBRE.

For mezzanine loans, returns of 8 percent on an annual gross basis are available, but with the probability of default going upwards, the report noted that risk-adjusted-returns stand at 4.3 percent – a drop from 5.4 percent reported across 2016.

Steven Williamson, head of debt and structured finance at CBRE, said: “Overall, margins have declined slightly in the first quarter, but this has been a highly selective phenomenon. Intensifying competition for lending on prime assets has driven margins down, but borrowers seeking debt against anything secondary or on development have seen little to no change in pricing.”

“These areas of the market remain more challenging, as lenders see prime values as being more resilient in the event of any market decline,” he added.