Valuation

Substantial growth in new entrants set to change the lending landscape

Savills opened its 26th annual financing property presentations in June in Edinburgh, addressing lenders under the theme of “Growth is here. Are the foundations solid?”.  We have identified 52 new entrants to the lending market over the last 12 months, taking our list of organisations with ambitions to lend to over 200 names, an unprecedented number in over 20 years of analysing the market. More than 60% of the 104 new entrants over the last two years fall into the ‘other lenders’ category, signalling a substantial presence from non-banks. 

So what does this mean for the market? Savills research shows that there is a significant imbalance between market opportunities for lending, which currently stand at £40 billion, compared to lender ambitions of £75 billion. The increased competition to lend has driven interest rate margins down (a lot) and LTV ratios up (slightly) and the spread of lending ambitions has become wider in terms of geography, risk and sector. The proportion of lending allocated to Scotland has remained broadly unchanged over the last five years.

Strong demand from investors in commercial real estate has continued to drive capital into alternative markets in search of securing returns. This has opened up opportunities for lenders particularly in the secondary arena, which offers a less competitive area of financing. We have identified three specific areas of opportunity: specialist property types (student accommodation, healthcare, pubs, hotels outside of London, data centres and self-storage); properties requiring an understanding of the fundamentals (development finance, value added opportunities such as refurbishments or office to residential conversions, medium term leasehold and secondary shopping centres) and general categories (small ticket <£5m, new customers and bridging finance).

We have already seen the lending landscape change with the pick-up in demand resulting in a reclassification of the property finance market. What previously was prime, secondary and tertiary is now core (highly competitive and includes prime, good secondary and ‘rising stars’), non-core (which is less competitive and includes the more specialist and alternative property types noted above) and “terminal decline”. Obviously, the lending margins will reflect the increased risk from what was previously prime but we are certainly not seeing any signs of reckless lending with loan to values remaining vastly lower than since these records began.

The foundations remain solid in the commercial markets but finding out-performance will become more challenging. The main opportunities remain outside of London where the recovery is still gathering pace, with Edinburgh, Aberdeen and Glasgow all expected to show good rental growth over the next five years, but even in these markets investors will need to be forensic in their approach to securing the best assets.  

The residential sector reflects a similar theme, with regards to opportunities in both the development and regional markets and with London’s strength now spilling outwards.  Savills mainstream residential five-year forecasts show robust growth of around 25% across the UK.

 
 

Key contacts

Craig Timney

Craig Timney

Director
Commercial Valuation

Savills Edinburgh

+44 (0) 131 247 3820

+44 (0) 131 247 3820

 

Graeme Fraser

Graeme Fraser

Director
Valuation

Savills Glasgow

+44 (0) 141 222 5866

+44 (0) 141 222 5866

 

David Murdoch

David Murdoch

Director

Savills Glasgow

+44 (0)141 222 5855

+44 (0)141 222 5855