Development lending is predicted to increase by more than a third this year to £10bn, according to a report from the Investment Property Forum (IPF).
Based on a survey of 35 lenders and 31 borrowers, financing for development for 2015 will reach £9.98bn in the UK, up from £7.45bn last year.
However, cost inflation, particularly in London, as well as skills and labour shortages may constrain future development.
The IPF’s Review of Development Finance said UK banks still dominate the market for senior lending on pre-let and pre-sold developments.
“Most UK banks are willing to lend anywhere in the UK provided it is for the right sponsor with the right scheme in the right place,” said the report.
UK banks are predicted to increase their development lending in 2015 by 13% to £4.55bn, which is a fall on 2014’s increase of 35% compared to 2013.
However, non-UK banks are expected to increase their funding by 73% this year, to £1.55bn.
Current loan-to-cost ratios offered are similar for both UK and non-UK banks, 50-70%, and average margins range between 245-315bps over LIBOR.
Alternative lending platforms such as debt funds are predicted to provide £3.8bn of funding for 2015, an increase of 51% on last year’s £2.52bn. They also provide much of the speculative funding available although banks are becoming more active.
“The business model alternative lenders use is broadly structured to meet investors’ IRR expectations, which range from 7% to 20%,” said the IPF.
Alternative lenders are also the main source of mezzanine finance, which is a market predicted to grow as the hunt for yield takes investors further up the risk curve.
The report stated that London pricing is a problem for all firms developing in the capital: “Many are now seeking new projects in the regional cities due to high site costs.”
The cost of building and a lack of skilled and experienced personnel could also constrain development.