UK property finance market in rare Goldilocks period

The UK property finance market is in a rare “Goldilocks period”, according to Savills’ Financing Property 2015 report.

Another 46 new lenders entered the market in the past year, the cost of borrowing was historically low, annual lending was up by more than 50% and senior loan-to-value ratios hovered around 60%.

“I think we’re going through a rare, brief spell of a ‘Goldilocks period’, not too hot and not too cold, long may that last,” said the author of the report, William Newsom, senior director at Savills.

At a presentation of the report in London, under the theme “Too much competition? Where are the best opportunities”, Newsom said 150 new lenders had entered the market over the past three years which, combined with some 75 existing active lenders pre-2013, makes as many as 225.

Of the 150, 60% were ‘other non-bank lenders’ including debt, private equity and special opportunity funds.

However, only 13.5% of lending last year was done by ‘other non-bank lenders’, despite them being so numerous. This group of lenders was, however,  forecast to grow to 30% market share in 2020.

New lending last year increased by more than 50% to £45.2bn, a post credit crunch high, but overall debt was 46% down to around £135bn on its peak in 2010.

The cost of borrowing and investment yields reached historcially low levels with the all-in cost of money falling below 3.5% and prime City of London yields dropping to 4%.

While LTVs for senior debt remained low at around 60%, the addition of mezzanine debt could see ratios rise to over 80%, a level last seen in 2006. But, overall, lenders were maintaining LTV discipline, said the report.

Mezzanine lenders in general were becoming ‘a mature and well respected’ part of the market with senior debt providers increasingly prepared to work alongside them.

Growing competition had sparked interest in loan syndication for bigger ticket deals with foreign banks, particularly the French and Japanese, becoming increasingly active.

“Syndication has been driven by investment houses who want to get into commercial property lending but don’t have the platform to do so,” said Newsom.

“This process not only has allowed foreign lenders to enter a market which can provide better returns than their own, but also has empowered those existing lenders seeking bigger ticket opportunities.”

Real estate lending was also providing higher returns compared to other asset classes.

Combined with the overall positive economic outlook for the UK, it was clear the market was in a rare ‘Goldilocks’ state, said Newsom.

For lenders, the best opportunities lay in development and value-add financing, regional property portfolios, alternative sectors such as hotels and student accommodation, and in cross-border or pan-European deals.

Regional markets saw increased confidence with more than 50% of total capital invested in the UK being for assets outside London. Last year also saw the highest ever volume invested outside London by foreign buyers and the trend looked likely to continue in 2015.