Sourcing real estate financing mandates in the UK has become more difficult in recent months – particularly in London, where a wide range of lenders are fighting hard to win transactions amid falling investment volumes.
In the first eight months of 2019, UK investment volumes dropped by 29.9 percent year-on-year to €28.6 billion, according to data provider Real Capital Analytics. Brexit has clearly unsettled property investors, and investment in London has been hit particularly hard, dropping 33.7 percent over the same period.
RCA data also show real estate investment flows into the ‘big six’ regional cities – Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester – were down by 24.9 percent. A sharp reduction, but also significantly less than in London.
The UK capital still has a reputation as a safe haven for foreign money. However, many of the active overseas investors there do not engage with local lenders. These investors either buy in cash or arrange debt in their domestic markets, which means fewer opportunities for Europe’s lenders. Against this backdrop, UK regional markets are an interesting proposition for debt providers looking to source new deals.
Brexit has created great uncertainty across all corners of the UK real estate market. However, some participants note the potential for value growth in the regions. This makes them more confident about lending there than in London, where high competition for core and core-plus deals has pushed yields – and loan margins – to low levels.
DekaBank’s head of real estate finance, Sebastian Vetter, told Real Estate Capital that the German bank in recent months has focused on markets outside London to diversify its UK loan portfolio, having closed lending deals in Birmingham and Glasgow.
The UK regions are attracting a greater proportion of investment volumes. According to Savills, investment into the regions, as at October, stood at 55 percent of the UK’s total real estate investment, compared with the five-year average of 35 percent. Edinburgh, Glasgow and Leeds saw high investment volumes in H1 – at £483 million, £451 million and £280 million, respectively – in line with the previous year’s figures.
Demand from investors that see scope for rental growth in the largest regional cities – because of higher tenant demand on the back of a shortage of product supply – has led to more development activity. This in turn has created financing opportunities for lenders.
Last week, development finance specialist Maslow Capital closed a £123 million loan to fund the construction of two residential towers in Manchester. Property consultancy JLL projects cumulative residential price growth of 22.8 percent in the city between 2018 and 2022, compared with 10.3 percent in London.
Although most lenders still focus their UK activity on the capital – 49 percent of loans were secured last year by central London assets, according to the mid-year 2019 Cass Commercial Real Estate Lending Survey – demand for finance is gradually shifting to the regions.
According to the latest UK CRE Debt Market Barometer, published in April by lender and debt advisor Laxfield Capital, 58 percent of all requests for finance last year were for regional assets. In 2014, by contrast, 59 percent of requests came from London.
More lenders than ever are providing finance to UK real estate. However, many have a remit to focus solely on prime London assets, often backed by well-known sponsors in prime locations. Some foreign lenders are simply not familiar with regional UK markets, while some market participants say smaller non-bank lending organisations have the risk appetite, but not the number of personnel, to effectively cover areas outside the capital.
Nevertheless, the changing dynamics in loan requests, as demonstrated in Laxfield’s data, should be taken into consideration by lenders, and particularly those struggling to source deals in the increasingly hot London market.
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