Lending organisations that specialise in writing a high volume of small-scale loans secured by property say demand for their products has remained steady, notwithstanding the effects of covid-19.
Small and medium-sized developers, they say, have continued to require construction finance, while property owners of various stripes have kept up demand for short-term bridge loans. Most real estate finance professionals regard the upper bounds of the small-ticket lending market to be around €15 million to €20 million. At the lowest end, loans can amount to just hundreds of thousands of euros.
Commercial and investment banks, as well as institutional non-bank lenders, focus their property lending above that mark, leaving a cohort of specialist lenders, fintech firms and challenger banks to compete for loans beneath it. The small-ticket property lending market is particularly active in the UK, where traditional high street banks have gradually stepped back from financing smaller-scale borrowers since the global financial crisis.
Despite the devastating economic impact of covid-19, the UK’s residential property sector, into which many small-ticket lenders supply development loans and buy-to-let portfolio finance, has remained resilient. According to the UK’s Nationwide Building Society’s index, annual house price growth in the UK was 7.3 percent in December – its highest level in six years.
“Despite the pandemic, the residential property market has been incredibly robust,” says Anurag Sharma, fund manager at LendInvest, a London-based alternative lending platform that provides sub-£10 million (€11 million) loans to property companies and landlords.
“There was a drop in activity during the first lockdown, as the residential property market was effectively shut with purchases and valuations unable to proceed. But, since then, there has been a strong recovery. Activity levels for sub-£10 million residential lending have remained relatively high.”
Property bridging finance firm Glenhawk has also witnessed healthy demand, particularly among developers for unregulated loan products. Guy Harrington, the firm’s chief executive, believes this was partly prompted by the UK government’s decision in July to implement a temporary stamp duty holiday on all properties up to £500,000.
“Demand is strong at the moment,” he says. “Developers still seem very keen to push on with speculative projects and take development risk on, reflecting the relative appeal of real estate as an asset class. They are increasingly targeting interesting opportunities outside of central London and are mainly requiring acquisition finance.”
Some borrowers have also managed to navigate choppy waters through payment deferrals provided by lenders. According to Sharma, during the first lockdown, LendInvest had close to 5 percent of its buy-to-let book on payment deferrals; the figure is now closer to 1 percent.
“The larger portfolio landlords that we lend to have generally managed to keep voids relatively low and, where they have had them, have used income from their wider portfolios to keep their mortgage payments up-to-date,” he says.
Martin Gilsenan, director of origination at Atelier Capital Partners – a London-based lender backed by investment manager M&G Investments – has noticed high levels of competition for loans of under £3 million. The refurbishment sector, he says, has been particularly lively, with lenders going head-to-head on loan prices.
“Interest rates are steadily coming down and loan-to-values are creeping up – 80 percent is becoming increasingly common,” says Gilsenan, whose company specialises in short-term finance for professional residential developers and SME property companies. “Markets like this are typically seen as good for borrowers and brokers – who are able to offer each client multiple options – and tougher for lenders.”
Gilsenan insists this has not created a race to the bottom on price. Instead, he says, it gives “dynamic, responsive lenders, which tailor each deal exactly to what the borrower needs”, the opportunity to set themselves apart.
Small-ticket commercial property lending volumes declined last year, says Harrington. However, he adds that investors continue to look for commercial properties: “There is a lot of liquidity in the marketplace and if the asset, location and price seem right, there is a strong buyer pool.”
Harrington describes a recent deal in which a borrower needed finance to convert a small department store into 14 apartments. The boom in online retail has also promoted investors to diversify towards logistics sites and warehouses, which are typically defined by long-term, stable yields.
“Smaller loans are proving crucial for one of the fastest-growing types of warehouse – the more compact, ‘last-mile’ units being opened in urban areas to enable retailers to ramp up their next-day delivery capability,” says Gilsenan. “The speed and certainty of good-quality bridging finance is particularly useful for investors looking to increase their exposure to this exciting sector.”
The small-ticket real estate lending market in continental Europe has also been active in recent months, driven by demand among project developers for mezzanine loans. According to Andreas Gerrit Müller, managing partner at Scopus Capital, a German alternative investor, demand for finance from developers in the second half of 2020 was so high that it contributed to “one of our most active years”.
“We focused our financing more on residential projects, senior living and student living, but also kept looking at other projects, such as hotels – even though they have not been so popular recently,” says Müller. “But there will be a time after covid-19 when the right hotel in the right location with a decent operator will be a wanted asset again.”
Recent deals suggest big banks and institutional investors remain keen to gain exposure to the small-scale lending space. In January, JP Morgan provided £500 million of funding for LendInvest’s residential lending strategy. In December, Glenhawk – which is aiming to grow its UK loan book to £200 million by the end of this year – received a £25 million mezzanine credit line from private investment firm Balbec Capital.
“New players are entering our space, attracted by the returns available,” says Harrington. “The institutional funder is clearly very detailed and selective as to the lender they want as partner. That is the challenge, and it is forcing businesses to level up from ‘old school’ bridging.”
As for the year ahead, the success of small-ticket lenders is contingent on several factors. Much will depend on the speed of national vaccination programmes. If rollouts gather pace, Scopus’s Müller believes 2021 will feature “solid investment opportunities for real estate mezzanine investors”.
Harrington predicts that the end of the UK government’s furlough scheme, scheduled for April, will have a negative effect on the domestic housing market. “Disposable income will drop and it will take several months to wash into transaction values and volumes,” he says.
However, he believes this will only reinforce the standing of non-institutional lenders as attractive alternative sources of finance for smaller borrowers. “Alternative lenders are helping developers achieve their goals and benefitting from continued retrenchment of the banks,” he says. “It’s a very competitive part of the market with new entrants all the time.”
Gilsenan is similarly hopeful for the months ahead. In the last three months of 2020, Atelier lent more than £35 million – its busiest-ever quarter.
“Despite the fragility of the wider economy, there are plenty of reasons to be optimistic in our sector this year,” he says. “With yields on cash likely to remain low for the foreseeable future, investor sentiment around residential property remains upbeat.”