UK property is currently hugely attractive and financeable: an overwhelming 81 per cent of lenders recently surveyed by De Montfort University, sponsored by Savills, said that they want to increase their exposure to the market this year.
Inevitably, many of these lenders would like to focus their activity on the prime markets of London and the south east. These markets are regarded as the gold standard by many investors, providing a secure and stable home for their investment. The close correlation with investment and lending origination meant London accounted for 47 per cent of all property debt allocated in the UK in 2016, compared with just 26 per cent in 2010.
For lenders, however, the desirability of London and the wider region poses a challenge. The stalwart lenders such as the clearing banks, larger international banks and institutions have found themselves joined by a growing pool of competitors, including challenger banks and alternative lenders, competing to fund a smaller number of higher value deals.
In addition, an increasing number of the larger trophy assets are being purchased by international investors, who are taking advantage of the depreciation of sterling to secure a currency discount on UK assets, and who may not need external finance.
Pressure on investment volumes has contributed to a reduction in lending origination. In 2016 loan origination fell by 17 per cent, of which only 39 per cent was targeted at new acquisitions, with refinancing increasing to 61 per cent (interestingly, this is the exact opposite of the situation in 2013 when new acquisitions accounted for 61 per cent of the market and refinancing 31 per cent).
Increasing market share in this environment is a challenge, but for the 81 per cent of lenders for whom it is desirous, there are several options:
- Diversifying by property type to include retirement living, student housing or build-to-rent (BTR) housing. Although there are approximately 48,000 BTR units in the pipeline, there is huge growth potential for investors given the continued demand for housing in the UK and the stable long-term returns on offer.
- Looking beyond London and the major regional cities to good secondary locations.
- Reducing the target loan size or considering portfolios in order to diversify risk
- Moving up the risk curve to consider secondary or speculative development opportunities, for instance in the UK regional office markets where rents are rising and growth is less volatile than in London
- Focusing on refinancing existing loan books to take market share from others.
Opportunities therefore do exist, but they potentially bring greater risk. It’s thus crucial for lenders to do their homework before considering diversifying.