Lenders offering more deals to UK residential property developers, new survey finds


Lenders to residential developers in the UK are taking on more risk as property markets stabilise after the financial crash, a survey of more than 50 major institutions has found.

The respondents, which include a mix of banks, institutional investors and private equity funds, are increasingly funding schemes outside London, plan to grow their loan books over the next year and are more open to planning risks and higher loan to value lending.

The findings of Knight Frank’s latest survey marks another step on the return to a more liquid lending environment following the financial crisis, when banks retreated from the sector.

It points out that the UK economy is tentatively returning to health and the prospect of a normalised interest rate environment. In September, the Office for National Statistics said the country’s economy was 2.7% larger in the second quarter of the year compared to its pre-crisis peak.

‘This was reflected in the number of lenders who intend to grow their loan books over the next year, with the figure rising to 78% in the third quarter of 2014 against 75% in the third quarter of 2013. Furthermore, the amount of respondents that would consider a scheme with planning risk increased to 60% from 50% last year,’ the report says.

‘However, there is no sign banks are returning to the years of higher risk lending that preceded the financial crash and they are joined by other lenders including hedge funds and other institutions that are attracted by relatively high returns in a world of low yielding assets,’ it adds.

It points out that this increased competition has forced down the cost of debt. Indeed, some 36% of respondents said they had reduced their pricing as a result of this increased competition while more than a quarter said they were prepared to take on more planning risk or boost the loan to gross development value ratio.

However, as more lenders enter the market following the retreat of the banks, some are struggling to lend in sufficient quantity or at the returns of about 13% that they envisaged.
As a result, many so-called alternative lenders, who planned to offer higher yielding mezzanine finance, have been forced to provide senior debt.

As these lines blur, with High Street increasingly open to mezzanine finance and specialist funds providing senior debt, and Peter MacAllan at Knight Frank Finance warned the lending market could not become much more crowded after the transformation it underwent following the financial crisis that brought a range of new entrants.

‘I have a feeling we are reaching saturation point. There are too many lenders chasing the same deals,’ he explained.

The report also points out that the sustainability of house price inflation is a concern for lenders, particularly in London, despite recent signs of moderation. Some 83% said they would consider schemes in zone 1 of London while 89% said they would consider zone 2 and beyond. That compares to 97% who would consider schemes in any part of London last year.

Meanwhile, appetite has grown for lending in the UK regions, where the recovery has been patchier. Some 38% said they would consider lending to a scheme in the Midlands in the next 12 months, while the figure was 34% for the north of England. That compares to 28% and 21% respectively last year.



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