The UK lending market is “nowhere near dangerous territory” despite a record number of new entrants driving down margins and the first signs of loan to value ratios rising.
In his annual Financing Property presentation this morning, this year called ‘Growth is here. Are the foundations solid?’, William Newsom of Savills said that there are a further 52 new would-be lenders since this time last year. This takes Savills’ list of organisations lending to over 200 – an “extraordinary” and “unprecedented number”. Of the 104 new entrants in the last two years, 63%, he said, were non-bank lenders.
However, there are only enough opportunities for half of them all to lend: based on the latest De Montfort commercial lending survey and its knowledge of the investment market Savills reckons there is about £40bn of debt currently needed but £75bn of lending ambition. “What impact is this huge number of players versus the flat opportunities having on the market?” he asked. “It has driven interest rate margins down, in some cases hugely…and LTVs have gone up, slightly”.
But, he said, despite the fact that Laxfield Capital’s most recent Debt barometer found “a huge increase in borrowers seeking higher LTVs”, there is “no way” the result had been “reckless” lending. “LTVs remain vastly lower than since these records began, by 15%, which looks solid”, he suggested.
“LTVs, margins, fees and ICRs are all not back to 2007 levels by a long chalk”.
Newsom said the UK banks and building societies are “in a bind” because tighter regulation is preventing them from competing with new lenders on pricing for prime assets.
In this environment, the best lending opportunities, for banks and many of the new lenders, would be development finance, “the case for which is clear” and lending against alternative asset classes and in the secondary arena, which are still less competitive. In particular Savills highlighted specialist property such as student accommodation, healthcare, pubs, regional hotels, data centres and self storage and value add opportunities, such as refurbishments or office to residential conversions. He also picked out general categories such as small tickets and bridging finance.
The mezzanine market is “red hot” he said, but experienced mezz lenders are finding opportunities because they have switched to whole loan and syndication strategies. Meanwhile, as Laxfield found, plenty of borrowers now want higher gearing and as senior margins have been squeezed there is surplus income left over to pay for mezzanine.
Newsom said the pattern was similar on the continent. In Germany’s prime property markets margins have fallen further, to 80 basis points in Munich and 90bps in the prime business district in Frankfurt.
Unveiling his list of most active, large ticket lenders, Newsom identified 25, four more than this time 12 months ago. They include 14 banks, eight insurance companies and three other lenders: Blackstone, GE Capital and Starwood.
He called insurance lenders a strong cohort with “a highly-attractive product that is brilliant for borrowers to lock in low interest rates”, but he said that they hadn’t done more business because most UK borrowers still want short-term loans.
He did sound one note of caution which is that “debt yield on (loan) exit is vital for a good outcome”.