Savills: Increased lending appetite drives diversification and specialisation in UK lending market
Savills opened its 29th annual Financing Property presentation in the City of London, addressing lenders on the theme of ‘Challenges in a Low Return Environment’. The international real estate advisor highlighted that with the spread between the all in cost of money and UK all property equivalent yield, UK property is currently hugely attractive and financeable. This is reinforced by 81% of lenders expressing a desire to increase their loan book in 2017, with an additional 14% wanting to maintain existing levels.
The lending market
Inevitably much of this lending appetite is focussed on the prime market, which has generated increased levels of competition due to a lack of available product. Figures from a survey by De Montfort University, sponsored by Savills, note lending origination levels in 2016 were down by 17%. Of this origination only 39% was targeted at new acquisition lending with refinancing increasing to 61%. UK banks and building societies increased their market share from 34% to 47% in 2016, with refinancing activity likely to be a contributing factor. Insurance companies and North American banks, who are primarily focused on the prime market and portfolios, saw a decrease in market share, while German banks maintained their position.
Ian Malden, Head of Valuation at Savills, comments: “Whilst the strong desire to lend is generating increased competition in the market, we are in a hugely multi-faceted environment where lenders are compartmentalised into niche groups focussing on different areas. However, with the prime sector at the top of the agenda for the majority, the balance of power sits firmly with the borrower for this type of product.”
Nick Hume, director at Savills, adds: “So where are the opportunities for lenders where the balance of power is reversed in their favour? We have seen it before, but in the current landscape of lower investment volumes following the EU Referendum, a lack of prime product and a lower return environment, diversifying and specialising has never been more poignant for lenders. Lenders can either remain with a low risk strategy and compete in a wider market or re-evaluate and selectively go up the risk curve.”
Savills notes that the overall lending market is stable with just 0.4% of loans by volume in breach and the average LTV ratio under 60%.
Opportunities to lend…
Savills highlights the main opportunity areas for lenders are: diversifying by sector; looking to regional cities; reducing the size of the target loan; considering good secondary products; extending focus to emerging players in the market and refinancing. Whilst the firm notes that each of these areas comes with its own cautions, the structural shifts in several markets have given rise to a range of new lending opportunities.
…in the commercial market
Prime assets and those in London continue to be attractive to investors who can hold their position for the medium to long term and are comfortable with stable, albeit comparatively low returns, says Savills, but there are opportunities to secure income which out-performs the market.
Mat Oakley, head of UK and European commercial research at Savills, says: “Prime will always hold its attractions but investors who are prepared to move up the risk curve may find opportunities in UK regional offices where rents are rising and growth is less volatile than in London, or in alternative assets, such as pubs, which provide secure income. Outside of London and the south east it tends to be a lender’s market, but borrowers looking at the regions are likely to find a broad range of niche lenders and alternative financiers willing to loan to those who have done their homework.”
…in the residential market
In terms of residential, Savills notes that the London market has cooled in response to Government tax policy, but there is increasing pressure to boost housing supply across a range of tenures particularly in the professionally managed sectors of the market.
Lucian Cook, head of UK residential research at Savills, comments: “Private renters aged 24-44 have increased by 1.3 million in a decade, driving demand for more housing across different tenures including built to rent homes. Although there are approximately 48,000 BTR units in the pipeline there is huge growth potential for investors given the stable long-term returns on offer.
“Similarly there are over a million debt free owner-occupiers over 65 in the UK, yet there are gaping holes in the market just waiting to be filled by a range of solutions, offering an opportunity to investors and ultimately lenders, but also creating more housing supply, freeing up family housing, and supporting more elderly households.”