Around 180 new lenders have entered the market since 2013, contributing to an increasingly diverse and balanced market, delegates heard at Savills’ 28th annual financing property presentations.
By the end of 2015, insurance companies and alternative lenders had grown their respective shares of the market to 16% and 9% respectively.
Savills forecasts that these will increase to 18% and 13% by the end of 2016, while the German banks, North American banks and other international banks will retain a 13% share each.
The market share of the UK clearing banks is forecast to decrease from 34% in 2015 to 30% by the end of the year, compared to 70% at their 2008 peak. This is due to the banks’ increased regulatory responsibilities, which has increased the cost of capital while slowing the decision making process, but fundamentally has had a positive effect on the market.
UK banks are still the most active in the market, with RBS being the biggest lender of 2015, according to research by De Montfort University.
William Newsom, senior director of valuations at Savills, said: “It is extraordinary to recall that in 2007 64% of all the lenders DMU spoke to thought a 80% LTV was ‘no risk’. Regulatory reform has had the desired effect, diversifying the market and allowing new entrants including the alternative financiers, who Savills believes are set to lend approximately £7.5bn by the end of the year, which is some 50% higher than reported by DMU.”
Gross lending volumes in 2015 reached £53.7bn, similar to the level seen in 2004/05 and up by 19% on 2014, but net lending after repayments has only just returned to positive territory. Furthermore, lending to property comprises only 8% of banks’ total lending – the same level as seen in 2002.
Loan terms have softened over the past 12 months with interest rate margins on senior debt increasing by between 20 and 50 bps since Q4 2015. Meanwhile, loan-to-value ratios have also come down due to macro-economic conditions, the current stage of the cycle and lenders’ increased costs.
With regards to the commercial property markets, while many have suggested that the EU referendum has impacted on activity, investment levels reached £13.8bn in Q1 2016, well above the long-term average of £9.5bn. There has been continued investment in the UK’s regional markets, which are projected to account for almost 62% of total volumes in 2016, with a record high of £10.9bn invested in alternatives.
Savills projects that total property returns on all commercial property will fall from 12.9% in 2015 to 4.1% in 2017, before climbing to 7.9% in 2020, with rental growth remaining steady.
Mat Oakley, head of UK commercial research at Savills, said: “Some sectors of the investment market may be softening, implying that it may now have peaked. However, the conditions of 2016 are very different to those of 2007: we are not overbuilding, nor are we pricing secondary assets as prime, and investors and lenders alike have a heightened awareness of the risks in the market.”
In terms of the residential markets, as a result of increased regulation, LTVs remain below the peak seen in 2007, with volumes of more than 90% of LTVs forming only 2% of gross mortgage lending in Q3 2015, compared to 14 % in Q3 2007. Average loan to income ratios have risen as buyers have stretched themselves to make purchases, particularly in London.
Lucian Cook, head of UK residential research, said: “LTVs remain low, although in London the creeping increase in LTIs is a concern, leaving the market vulnerable to an unexpected interest rate rise.”
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