The post-EU referendum, post-US election market remains uncertain. On one hand we have seen significant tightening in liquidity for development financing, while on the other there have been a number of recent deals suggesting the market is alive.
From our perspective, we continue to support clients on numerous transactions.
Market conditions continue to affect pricing. Margins have risen by around 50bps or more and up-front fees have increased, with commitment increased as a percentage of margins.
As liquidity is tighter, delivering larger transactions requires greater lender incentivising to maximise the chances of deal execution. Loan-to-value and loan-to-cost metrics have tightened and our sense is that lenders will continue to adopt a prudent approach given the current environment.
It is difficult to identify trends with certainty. We hear that some European lenders are out of the market and our loan markets team, which keeps a close eye on liquidity, has seen a drop-off in appetite from some peripheral players. Whether this is a result of lenders pausing as they have met targets for this year, or represents a more fundamental move away from the UK development finance market, it is too early to say. And we are still seeing continued appetite from others.
Our pipeline is very active and we are working with both new and existing clients on several transactions. We have many viable opportunities across asset classes both in London and regionally. Our prudent approach remains in that we support well-structured deals with experienced developers with the right product in the right place. When de-risked by prelets or healthy pre-sales, we think these deals will continue to attract interest from the market’s more active players.
As we emerge in the post-referendum and US-election world – recognising the impact of a slowed investment market –demand for development funding remains firm and we find that there are plenty of opportunities that meet our appetite. Our challenge is to deploy our support in an optimum fashion to support clients.
We see more activity in emerging asset classes such as the private rented sector. Our policy framework for both PRS development and investment is in place and we are working on mandates in this space. We also want to support clients in other asset classes seeking to build on successes such as the Select student accommodation and Pocket Living deals.
Product innovation is relevant too – for example, exploring how to give our clients investment-term loan certainty beyond the development phase either via in-house solutions or via the capital markets.
The shape of Britain’s future relationship with the EU and the direction of a Trump presidency both remain unclear and the uncertainty that has characterised this year will continue to prevail in 2017. However, the outlook for next year is not entirely dominated by the possibility of downside risks.
• Graeme Alfille-Cook is head of developers at Lloyds Bank Commercial Real Estate
