At the smaller end of the UK’s real estate finance market – below the big banks, insurers and private equity debt funds – a range of challenger banks, specialist lending businesses and peer-to-peer platforms have emerged in the current cycle.
These ‘challenger’ lenders, to put a collective badge on them, operate a range of business models and target niche strategies, including residential and commercial development loans and short-term bridging finance. Yet their message is usually the same: that the big banks no longer meet the needs of many real estate owners and developers, while the challengers are taking a fresh, customer-centric approach.
Such firms claim to be creating a viable, long-term alternative to the old guard. But, in the case of many upstart lenders, such assertations are questionable. Some parts of the property lending market, such as bridge finance, have low barriers to entry. Plenty of people with a lack of real estate market experience have set up shop, attracted by the prospect of high returns. Others, with the intention of building substantial property loan books, have gone out of business after failing to reach a suitable scale.
However, across the small-scale lending space, a core of organisations has reached critical mass. These lenders have expanded their sources of capital, earned investor backing and diversified their suites of loan products. Some niche lenders that began life raising retail money online now manage institutional capital, which has allowed them to upscale their lending activities.
In recent months, there have been plenty of loan-on-loan financing deals. Banks have gained access to specialist lending strategies by providing credit lines against the sort of lending they do not usually do.
Challenger banks are also funding emergent lenders. This was seen in OakNorth’s £30 million (€33.5 million) credit facility this month to recently launched specialist funder Hilltop Credit Partners, which is backed by Round Hill Capital, for lending to UK SME residential developers.
Most of the big banks have returned to property lending in the years since the global financial crisis. But their lending appetites and risk parameters remain constrained, mainly because of regulatory capital requirements. Those emergent lenders working hard to build solid, long-term businesses are gaining credibility and are taking on a role in a more diverse real estate finance industry by providing loans of a size and risk profile that do not make sense in the larger banks’ property loan portfolios.
In some underbanked parts of UK real estate finance, such as residential development, market observers have credited new-wave lenders as an important source of liquidity.
The evolution of challenger lenders in the UK real estate debt market is the subject of the first cover story in our redesigned print publication, which will be hitting subscribers’ desks this week. The online version will be published on 3 June.
Email the author: email@example.com