Insurance companies are not replacing banks as a significant source of finance for UK commercial real estate, according to Savills senior director William Newsom.
Speaking at the agency’s annual Financing Property breakfast in London, Newsom said that, despite expectations that insurers would take a greater role, the UK did not appear to be moving closer to a US-style lending market.
“Why have they not done more? They distinctly offer long-term, fixed debt so that should be brilliant for borrowers,” Newsom asked, having counted five new insurance companies offering finance last year, compared with nine in 2013.
One factor, Newsom said, was a lack of appetite for long-term debt. Borrowers are now typically looking for short-term debt of less than five years. Banks, he said, are therefore “holding firm”.
Newsom said there was a highly diverse group of lenders, having counted 52 lenders looking to offer finance in the last 12 months, level with the amount found in 2013. He also noted an increase in peer-to-peer lending.
“It’s a borrower’s market,” Newsom said.
But with core margins decreasing to around 120 basis points, regulatory restrictions and costs rising, UK banks are being “priced out” of some areas of the lending market, he said, with the core segment crowded and strong competition from equity investors.
Conversely, non-core property is a good lending opportunity, he added, with margins between 350 and 600 basis points. With demand increasing and supply down, development finance was also an area for lenders to turn to.
Static loan-to-value ratios – largely unchanged at around 65% – meant mezzanine lenders were more prevalent in the last 12 months. There was, said Newsom, a “huge imbalance” between lending ambition, totalling around £75bn (€92bn), and debt availability (£40bn).
Institutional lenders boosted UK real estate lending activity in the last year, according to a study released last week by Laxfield Capital. The advisory firm’s annual UK Commercial Real Estate Debt Barometer, which sampled £37bn of loan requests, found the presence of institutional money had marked a “real change” in commercial real estate debt.