In the event the world changes again as dramatically as it did a month ago, the basic epithets expressed will remain relevant. While we are currently in a “wait and see” world, the political crisis, which is in danger of tipping us into an economic one, must not allow all of us operating outside the Westminster bubble to lose the confidence to find value, transactions and profit.
The real estate lending market, once dominated by the big banks, now includes a greater diversity of lenders. Insurers, pension funds, private equity and private wealth funds have become increasingly active in the lending vacuum following the collapse of Lehman Brothers and the ensuing financial crisis.
Reforms in the banking sector
“Shadow banking” is generally understood to mean “non-bank credit activity”, which includes activities such as deposit-like funding structures, leveraged positions, the avoidance of regulatory supervision and the interweaving of many contractual relationships with banks. Hedge funds, investment funds, asset managers, insurers, pension funds and peer-to-peer lenders have all been variously badged as shadow bankers, although this is an unwelcome description from their perspective and somewhat misleading.
Calls for reform came soon after Lehmans collapsed, when regulators were criticised for allowing leverage levels and attendant risks to rise unnoticed outside of the banking sector. G20 countries were the prime mover and the EU Commission also released a road map of reforms for shadow banking in September 2013.
The banking sector, hit by the cost of implementing the stringent regulatory requirements of Basel III, also lobbied for similar regulation to be imposed on non-bank lenders, to create a more level playing field. Three regimes: AIFMD, Solvency II and MiFID 2, bring tighter regulatory standards to alternative lenders with a role in real estate lending and equity investment.
AIFMD and Solvency II have been implemented in the UK. MiFID 2 is to come into force on 3 January 2018 and the FCA has stated that firms “must continue with implementation plans for legislation that is still to come into effect”. However, post-Brexit, it is difficult to imagine that UK regulators will have the appetite or resource to pursue further reforms in the near or even medium-term future. This must play into the alternative lenders’ hands.
Increased appetite
Insurers have demonstrated their enthusiasm for real estate lending. Asset management firm BlackRock published a report in 2015 indicating that 82% of insurers surveyed intended to increase their exposure to alternative assets such as real estate. Long-term lending suits insurers’ long-term liability profile and, with attractive pricing, this has provided opportunities not to be missed.
The contribution of private debt funds to commercial lending is still small in comparison to that of banks, at 26% of the European-focused lending market; but it is growing. From January 2008 to mid 2015, the top 50 private equity houses raised nearly $200bn to invest in real estate through debt and equity. The more speculative end of development finance is often an attractive investment sector for private equity, in contrast to the prelet or pre-sold schemes preferred by banks. Many of the funds have been growing and continue to raise new money. It is also of note that the product range of these funds is wide and flexible.
The peer-to-peer lending market, in its infancy but growing rapidly, has shown a marked appetite for real estate investment. In the period between 2014 and 2015, debt and equity funding in the real estate sector from this set reached £700m. Some 41% of the total volume of peer-to-peer business loans in 2015 was attributable to real estate loans. The sums at stake per transaction are currently small, but loan sizes are growing.
The online alternative finance sector grew by 84% in 2015 and loans to small- and medium-sized property developers dominate this sector (reported by the Cambridge Centre for Alternative Finance).
Although banks are likely to maintain their dominant position in this field, it is clear that alternative lenders are here to stay.
Opportunities in planning
In the current climate, where value is being questioned and undoubtedly the market needs to find its level, looking for fresh investments is hard, but it may be that planning-related opportunities present a solution:
- Purpose-built student accommodation is becoming more interesting and there is a suggestion of a shift towards accommodation which would be in the private rented sector and open to both students and non-students. This is to stifle the increasing student accommodation/ghettoisation planning arguments, and to encourage balanced and mixed communities.
- Due to the dearth of good shed sites and shed opportunities, particularly with rail links, there is a new focus on ports along the south and east coasts, such as Harwich and Southampton, where expansion plans will need to be aligned with warehouse and distribution networks.
- A new and revised form of retirement living is coming to the fore. These developments are aimed at people looking to downsize portfolios of property with more flexible living arrangements.
- It is possible that the focus of the Neighbourhood Planning and Infrastructure Bill will shift more onto delivery of development and infrastructure, and less on neighbourhood planning changes, as part of the move to attract overseas investment. The bill was likely to have been devised assuming a Remain vote. The government that will now exist is in a different economic environment; it will want easy and early wins.
The policy position regarding government-backed infrastructure was made clear in a speech by the secretary of state for transport this month: “Investment in the long-term infrastructure we need has become more important, not less. And be certain: the investment will continue.” While no-one is saying “crisis, what crisis?” it is clear that there remain many opportunities suitable for the regulation-light alternative lender community.
Rodney Dukes is head of the finance group at Taylor Wessing