The UK housing debt gap creates opportunities for lenders

Britain is in dire need of residential development. Debt providers can play an important role in supplying the necessary finance.

The latest UK property debt deals featured in Real Estate Capital’s weekly downloadable Lending Data table highlight that lenders are prepared to finance residential-led schemes across the country.

This month, in London, UK clearer NatWest provided a £65.5 million (€75.9 million) stretch senior development facility for the construction of 338 new homes – 59 of which will be listed as affordable housing – on the banks of the River Lea. In central Birmingham, residential specialist Urban Exposure wrote a £66.9 million loan for a mixed-use housing and commercial scheme with consent for 379 apartments.

Debt providers, particularly among the UK banks and in the specialist lending sector, see the opportunity in supporting the UK government’s ambitious target for the construction of 300,000 new homes each year by the mid-2020s.

Lending initiatives launched in recent months are intended to support housebuilders’ financing needs. The partnership between Barclays and the UK government to provide £1 billion of development finance to support small and medium-sized housing developers made the headlines in September last year, for instance. More recently, in February, Santander teamed up with private property firm Topland Group to launch a £200 million residential development financing platform for the UK’s SME housebuilders.

However, the current supply of residential development finance – with new lending totalling £2.2 billion in H1 2018, according to Cass – is not sufficient to support the amount of development needed to tackle the UK’s undersupply of housing. Take the West Midlands, for instance, which has a target of 215,000 new homes to be built by 2030-31, meaning an additional 9,827 homes per year, on top of the average of 6,711 homes currently built each year.

With house prices in the area averaging £188,516 and developers traditionally needing to borrow 55 percent of the sale value of the home they are building, more than £100,000 of development finance will be required for each new home, according to Urban Exposure’s calculations.

This means local developers will need close to an additional £1 billion of development finance each year, or £13 billion in total, to hit house-building targets in the region by 2030-31. If a 2.1 percent house price growth is factored into this calculation, the figure rises to over £15 billion.

Although lenders have increased their appetite for development loans in the last five years, debt finance for UK residential construction is still relatively scarce, particularly in the regional markets. Some market participants believe the lack of funding for residential developments is linked to regulatory pressures that traditional banks face.

Loan margins could encourage lenders to back residential development: these range from 5 percent to around 9 percent, depending on the risk profile of the project, sources say.

Beyond pricing, however, there is a more fundamental reason to support Britain’s residential market. Lenders increasingly place value on the need to back property sectors underpinned by compelling demographic trends; the UK remains in desperate need of residential development to keep pace with population growth. Lenders can play their part in solving the housing crisis, by backing housing schemes in areas where there is most need for them.

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