Savills: syndication bolsters UK lending market

Increased competition in the UK lending market has sparked a focus on loan syndication for the bigger ticket deals, with French and Japanese banks increasingly active as well as other nationalities, according to William Newsom, senior director of valuations at Savills.

'Syndication has been driven by investment houses who want to get into commercial property lending but don’t have the platform to do so,' Newsom told Savills' 27th annual financing property presentation in London on Tuesday.

Lead arrangers are selling down to these parties which not only is good for balance sheets but also spreads risk, he added. 'This process not only has allowed foreign lenders to enter a market which can provide better returns than their own, but also has empowered those existing lenders seeking bigger ticket opportunities.'

Newsom noted that he had identified a further 46 new entrants to the lending market over the last 12 months, bringing the total to 150 new lenders in the last three years. Including existing players from pre-June 2013, this brings the total number of lenders in the UK to 225.

While conceding that the lending market in the UK had become 'very well populated,' Newsom presented a case for a finance market that is neither too hot nor too cold. Whilst there has been a jump in overall lending by 50%, the debt mountain is reducing and real estate lending is presenting higher returns when compared to other asset classes, he said. 'Yields are low but so is the cost of money, indicating there is scope for yields to go lower.'

LTVs
He added, however, that whilst LTVs (loan to value ratios) for senior debt remain low, the addition of mezzanine debt can see LTVs rise from circa 60% to over 80% - levels seen in 2006.

'The mezzanine debt market is on the increase but it's both mature and well respected. It is provided by specialists who understand the risk and rarely lend on smaller or prime deals. The figures work best on higher yielding properties of above 6.5%.'

According to Savills' research, the commercial property markets in the UK continue to recover, with more than 50% of total capital invested in the UK targeting locations outside London. Furthermore, figures show that 2014 saw the highest ever volume invested by non-domestic parties outside London, and this looks likely to continue in 2015.

Mat Oakley, head of commercial research at Savills, said: 'With nearly every sector across the board showing yields within 25 basis points of the lowest level recorded, identifying the areas of strong tenant demand and rental growth prospects has never been more important.'

Residential
In terms of the residential markets, Savills reported that there has been limited capacity for house price growth, in particular in London. While house price growth over the next five years is expected to total over 25% in the South East, East and South West, in London it is forecast to be much lower at 10.4%.

'London has been seen as a developers’ gold mine but there must now be a tighter focus on infrastructure and core fundamentals in the capital,' according to Lucian Cook, head of UK residential research. 'Though we have identified 21 potential development hotspots in London, we expect to see increasing attention on the regional development markets over the next five years.'