New entrants
Savills has identified a staggering 104 new entrants with ambitions to lend to UK real estate in the past year – most defined as “other lenders” such as debt funds. However, analysis of market activity reveals this majority – some 63% – were behind only 12% of 2013’s new loan origination and hold an even slimmer 3.5% of total loans books.
Lending ambitions increase 25% year-on-year over 2013/14/15
The agent’s Financing Property presentation shows it is insurance companies and pension funds that have increased their lending activity the most in the three-year period, growing from 11% to a quarter of the £75bn total.
Property finance reclassified
A pick-up in lender demand has led to a reclassification of the property finance market. Prime, secondary and tertiary has been usurped by core, non-core or terminal decline. Core includes prime, good secondary and “rising stars” and is highly competitive, with interest rate margins of between 150-120 bps.
It is the less competitive non-core class, with margins of between 350-600 bps where lenders can achieve good risk-adjusted returns. This “future core” class includes specialist property types, such as student accommodation and healthcare, or properties requiring an understanding of specifics, such as speculative development finance, which Savills identified as a huge missed opportunity by lenders.
A comparison of supply and demand across the three major sectors presents a clear case for development finance, Savills says. Residential finance was popular with 69 firms, but just 10 lenders were willing to finance speculative commercial new build.
