Greater competition for prime lending has led to a tightening of margins in the first quarter of 2017 with lending margins falling by 9bps.
CBRE’s latest UK Debt Prospects MarketView showed that the all property lending margin now stands at approximately 2.3%, down from 2.4% at the end of 2016 where margins held broadly flat.
A fall in margins reflects an increased appetite from lenders to provide finance, as concerns over the EU referendum continue to subside. However, the market remains polarised with lenders showing a greater inclination for prime assets whilst remaining more reluctant to finance development projects or secondary assets.
Most notably there has been a fall of around 15bps on margins on prime lending whilst margins for secondary lending have remained static.
Steve 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 here down by 15bps or so, 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”.
Q1 was the fifth successive quarter when the premium offered by CRE debt to Gilts exceeded 2.5% on a gross return basis - the premium of 2.9% at the end of Q1 is the highest since Q4 2014. Similarly, the premium relative to corporate bonds was greater than 1.5% for the fifth successive quarter, sitting at 1.7% in Q1.
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