Break away from the pack

Those real estate lenders willing to branch into niche sectors will stand the best chance of winning business, writes Savills valuation director Nick Hume

During our recent survey of the UK real estate lending market ahead of our latest Financing Property presentation, it became apparent that the composition of lenders is more diverse than ever, with up to 250 participants.

That’s a huge change since 2010, when, although many banks claimed to still be open for business, the actual number of active lenders was more like 50. Indeed, only a limited number of today’s 250 will be genuinely active on a frequent basis.

The market has become less dominated by banks, with the emergence of insurance, pension fund and debt fund lenders, all of whom have entered the sector in search of returns. More recently, there has also been the rise of challenger banks, crowdfunding platforms, peer-to-peer lending and, to a lesser extent, lending by property companies.

The lending industry has therefore become more specialised and niche in its operations. From a borrower’s perspective, finding the right lender is more challenging than ever, which could result in an increasing propensity for the use of brokers.

The majority of lenders are eager to increase their loan books. However, this is in the face of a declining real estate debt mountain, lower levels of demand for high leverage and a reduced quantum of new origination – which was down by approximately 17 percent in 2016. One of the principal issues is the lower levels of financing on new acquisitions, which accounted for about 40 percent of the market in 2016, down from approximately 60 percent in 2013. This partly stemmed from reduced commercial transactions, which were down by 24 percent nationally in 2016. This is a market starved of new opportunities at a time when most lenders want to increase their loan books. This represents a current threat to the lending industry and points to continued pressure on origination volumes.

Prime focus

Whilst the lending market is broad, there tends to be fierce competition at the prime end within London and the larger cities – whereas there is far less competition for more secondary assets in the regions. Indeed, nearly 50 percent of the aggregated debt at the end of 2016 was allocated to central London. Regulation favours prime properties by making it more expensive to finance higher-yielding properties in secondary locations, and the lenders tend to prefer large lot sizes from a cost perspective, which are typically found in the larger cities.

Also, given a combination of the propensity for lower loan-to-value ratios, a reduced demand for debt – partly due to overseas purchaser activity and increased UK institutional demand – and the possibility that the quantum of prime investment transactions could be under downward pressure, fewer lenders could be genuinely active over the next 12 months.


There are, however, opportunities if lenders are looking to maintain or augment levels of origination. Firstly, lenders could increasingly follow their customers into the regions. Many of the lenders are already embedded in the regions, but there is a general reticence amongst some to seek scale, partly due to a combination of team size, coverage and the granular nature of the loans limiting returns.

Secondly, lenders could diversify in terms of property type with a greater coverage of secondary assets to derive improved margins. Alternatively, they could move into other sectors such as retirement living, student housing, pubs or build-to-rent.

Thirdly, in the face of reducing loan sizes, lenders could reappraise their targets to capture more business and/or consider portfolios for a diversification of risk. Fourthly, lenders could move into more development opportunities, but many remain selective and are held back by credit functions and regulation. That said, selective commercial development funding in undersupplied markets represents an opportunity with high margins achievable.

Finally, lenders may increasingly focus on refinancing the existing loan book and/ or take market share.This might bene t the larger organisations due to their captive audience. Alternative lenders might also increase market share by refinancing higher-risk assets.

There are opportunities, with higher returns available through diversification, but that entails moving up the risk curve. Specialisation and knowledge of the location and asset type are of paramount importance if lenders are to diversify in order to maintain and increase origination volumes.