The impact of COVID-19 on real estate finance

The impact of COVID-19 on real estate finance

Special Report

3rd Nov 2020

COVID-19 continues to impact every aspect of the built environment - and the financing of real estate is no exception.

Using our proprietary mapping of real estate lending activity, our research team identified four key insights into the impact of the pandemic on the UK real estate finance market in 2020.

Read on to find out how the market has been affected this year, plus see how the impact varies across specific regions and cities in the UK.

1. Lending volumes dropped by over 40% in 2020. That’s lower than pre-2015 levels.

In the last five years, the real estate finance market has been growing steadily (see Exhibit 1).  Despite a challenging macroeconomic environment and end of cycle rumblings, the monthly comparison of 2020 vs 2019 shows an optimistic start to the year (see Exhibit 2). In fact, the data shows a 15% increase in real estate lending volumes in January.  However, as the UK entered lockdown, the market outlook rapidly changed. Lending volumes dropped by 12% in March - a drop that accelerated to -38% in April and hit a floor of -42% in May. The message is clear: real estate lending took a major hit this year, with lending volumes dropping to their lowest levels since 2015.
Real estate lending volumes
Exhibit 1: Real estate lending volumes 2015-2020
In Q3 we can see the market beginning to stabilise. Between July and September, the monthly change against 2019 steadied around a 25% decline. However, as we enter a second UK wide lockdown expect market volatility to continue.
Real estate loan volumes 2019 vs 2020 (Monthly % change)
Exhibit 2: Real estate lending volumes 2019 vs 2020

2. Regions in the UK were impacted consistently, yet some areas are recovering faster than others.

Real estate loan volumes by region
Exhibit 3: Real estate loan volumes by region 2019-2020 (Quarterly % change)
Covid-19 had a fairly consistent impact across regions, with every region reporting a significant slump in Q2 (see Exhibit 3).  Scotland, the South East and the West Midlands were worst affected, dropping by over 40% in Q2 2020 vs. Q2 2019. But if we compare this to areas such as the South West and the East Midlands, loan volumes still shrunk by ~35% in Q2 2020. However when it comes to recovery, Scotland, the North East and Wales fared significantly better in Q3. In fact, Scotland showed a rise of 12.2% in Q3 2020 vs. Q3 2019. Meanwhile, the decline in Wales and the North East softened from declines of \~40% to \~18%.

3. The impact of Covid-19 on cities varied significantly.

Real estate loan volumes by city
Exhibit 4: Real estate loan volumes by city 2019-2020 (Quarterly % change)
While the regional data shows limited variation, the split by city tells a different story.  The data for Q1 highlights some outliers with Leicester leading the way. Leicester reported a positive growth of almost 50% against 2019 volumes, with Nottingham (28%) following suit (see Exhibit 4). In Q2 2020, we can see significant differences between how cities fared against Q2 2019 volumes: * Edinburgh (-65%) and Coventry (-59%) experienced the sharpest decline * Nottingham (-26%) and Bradford (-23%) were least affected As we move into Q3, the three cities that fared better in Q2 (London, Nottingham and Bradford) are seeing comparable drops in Q3. Whereas, those hit the hardest in Q2 (Edinburgh, Coventry and Manchester) have significantly lower drops - in the region of 20%.  Glasgow is the only city to have seen positive growth in Q3 2020 with a 50% increase in the number of loans vs. Q3 2019.

4. Buy-to-let focused lenders were hit the hardest, followed by challenger banks.

Real estate lending volumes
Exhibit 5: Number of loans by lender type
All commercial real estate lenders saw a decline in real estate volumes from March 2020 onwards.  However, the number of loans by buy-to-let focused lenders showed the largest drop of any lender segment: falling from 1832 to 896 monthly loans between February and May 2020, equivalent to a 52% drop. So, how did the other lenders fare between February and May 2020? * Debt funds: -67% * Specialist lenders: -51% * Bridge lenders: -50% * Challenger banks: -41% * Clearing banks: -36% * Overseas bankers: -30% * P2P: -11 %

Is this the new normal for UK lending?

A turbulent year has seen a dramatic decline in lending across the UK, and as we enter the winter lockdown we’re set to see continued volatility in the market. So what does this mean for the industry? Access to accurate, meaningful, comprehensive data has never been more important.  Native Finance opens the door to the entire lending market. With connections to over 360 commercial real estate lenders, our smart tools help you source the best lender for every deal, while our tracking of over 1.5 million loans keeps you plugged into the heart of market activity across the UK.
Find out how Native Finance can help today.

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