The UK needs flexible lenders

Non-bank lenders’ recent strong performance shows that real estate debt providers in the UK should look outside core, prime markets.

The latest biannual missive on UK property lending from De Montfort University shows that plenty of organisations want to provide debt, but they are chasing a dwindling set of prime deals.

The £17.6 billion (€19.7 billion) of new origination in H1 2017 was down almost a quarter from the previous six months. The report noted a “significant pipeline” of deals could boost full-year numbers, but, let’s face it, the UK has not been an easy place to be a property lender this year.

There have been fewer large transactions, an increased volume of equity in the market has reduced the need for debt and Asian buyers have by-passed local lending teams, instead opting to source finance in their home markets.

While most lenders are focused on core, prime investment property, there is a clear opportunity in the UK to broaden lending strategies; by geography, by sector and into development.

De Montfort’s findings show that lenders’ fixation on prime London deals is hampering their UK market growth. German banks are committed to the UK, but mainly want core assets. Year-on-year, their origination volumes dropped 43 percent in the first half of 2017. Other international banks have limited experience of the UK outside London and saw a 22 percent year-on-year drop to £2.4 billion.

The US investment banks only get interested in big-ticket financings. Their originations dropped a whopping 64 percent between H2 2016 and H1 2017 to £652 million. Insurers’ UK volumes were not flattering either, with a 39 percent drop between the last half of 2016 and first half of 2017, to £1.6 billion.

Keep an eye on insurers, though. In recent months, they have proved willing to write loans typically associated with banks – Legal & General’s three-year loan to a transitional London property is a good example – and many are becoming more flexible in their market approach. It is also worth bearing in mind that significant volumes of insurance money – around £1.7 billion – have been funnelled into the market through debt fund managers.

The latter group – denoted by De Montfort as ‘other’ non-bank lenders – are proof that being flexible and looking for less-straightforward deals can create lending opportunities. They were the only group to increase origination in the first half of the year, by an impressive 9 percent from the previous six months. Compared year-on-year, it was a 59 percent increase.

Indeed, ‘other non-bank lenders’ were the second-largest originator group – behind UK banks and building societies – in H1, with £2.9 billion. More than half of their business financed new acquisitions. Two alternative lenders even made it into the half-year’s top 12 lenders.

The clearest message that lenders are looking for extra margin is the 23 percent of new origination which financed developments. The overall allocation to commercial development finance increased from 5 to 11 percent.

Domestic banks deserve credit here. While the other non-bank lenders accounted for 25 percent of residential and 35 percent of commercial development finance, UK banks (plus the one remaining building society in the survey) provided 64 percent of residential and 44 percent of commercial development finance. Although UK banks’ lending volumes did drop by 28 percent between H2 2016 and H1 2017, they remained by far the market’s biggest lenders, with more than £8 billion provided in the six months.

Lenders in the UK are still overly-focused on London – the capital accounted for 42 percent of origination in H1 – but the survey did suggest that lenders are becoming more open-minded about geography, as well as alternative sectors. For instance, 25 lenders, up from 17 at year-end 2016, provided terms for residential investment lending, with private rented sector residential capturing the imagination. Twenty-seven lenders offered terms for hotel loans, up from 22 at year-end 2016.

Rather than a large pack of lenders chasing trophy London deals, the UK needs liquidity across regions, sectors and in development. Lenders should not compromise their risk parameters, but as the De Montfort report shows, the path to growth in the UK can lie outside the core.

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