UK lenders are 'blinkered', Savills report shows

The UK lending market is ‘very polarised’, according to a new report from Savills.

Hugh swathes of the UK property market are being ‘neglected’ as risk-averse lenders concentrate on prime investment in London - both commercial and residential - turning a blind eye to regional markets and secondary properties in the process, according to speakers at Savills’ 25th annual Financing Property conference in the City of London earlier today (4 June).

Speaking at the conference, which ran with the theme ‘Is there a property lending boom ahead?’, William Newsom, a senior director at Savills in London, said that, subsequently, the
UK lending market is becoming increasingly polarised, despite an influx of new lenders with an appetite for ‘big ticket’ lending.

According to Newsom, there has been an influx of 52 new lenders in the UK market in the past year alone - up from just 10 a decade ago - including Aviva Senior Debt Fund, CBRE Senior Debt Fund, Europa Capital and Henderson Global Investors. There are also 47 investors offering ‘big ticket’ lending of £100 mln or more in the UK, including BayernLB, Deutsche Pfandbriefbank and Blackstone, he added. However, many lenders have a blinkered attitude to lending, preferring to focus on prime property, largely in London.
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The main driver has been the commercial considerations. It’s the magic combination of high property yields and the low cost of money,’ Newsom told PropertyEU. ‘We’re basking in the glow of exceptionally low interest rates. German banks continue to be very active in the UK, as do private equity groups, which have a significant appetite (for the UK market).’

Nonetheless, the appeal of the lending market is clear: the high yields, low cost of borrowing, high margins and low (safe) yields make it a no-brainer for many investors, said Newsom. But that could change: the average cost of financing today, including the credit spread and interest rate margin is around 3.73%, which is expected to increase to around 5.62% in the next five years. The five-year swap could also be higher, which would likely send the true cost of refinancing to 8% or even higher, which might not be sustainable.

In addition, the debt mountain in the UK is still sizeable: Leicester-based De Montfort University estimates that there is still a legacy loan book of £197.9 bn in the UK, up from £50 bn in 1999. Although it has been six years since the onset of the financial crisis, only around half of this figure has been worked out and around 49% of these loans are due for repayment by 1 January 2015. Moreover, loan volumes have still not recovered, with just £32.4 bn of loans underwritten in the UK last year, down almost 24% on the long-term average of £42.5 bn, according to De Montfort University. Subsequently, a property lending boom, either now or in the near-future, is looking increasingly unlikely, according to Savills.

‘Every market we have examined is forecast to show positive growth over the next five years,’ said Matt Oakley, head of commercial research at Savills in London, speaking at the conference. ‘However, talk of a boom is massively premature,’ he added.

Exacerbating the problem is the fact that despite the ‘huge amount’ of players in the market, ‘everyone is chasing the same product’, said Newsom.

‘Lenders need to look beyond immediate cash flows and rediscover the joys of the regions and good secondary product as much of it remains underpriced and can offer better security in terms of future growth and value,’ he added.

However, the slight increase in investment outside London in the first quarter of the year – to 45%, up from 42% - suggests that investors are slowly starting to consider regional opportunities, not least because of the higher yields. ‘We expect all sectors in the regions to see stronger rental growth over the next five years than they have in the past ten. Confidence will change over the next year with capital growth no longer negative and regional growth picking up,’ said Oakley.

Regional prime office yields are typically around 6.47%, representing the widest spread against London since 1991, according to Savills. (Prime office yields in London’s West End and in the City of London currently stand at 3.75% and 4.75% respectively, according to C&W.) The gap between prime and secondary yields has also continued to widen and is now around 450 bps, the widest level since the end of 1995, according to Savills.

For investors looking for good lending opportunities over the next decade, supporting institutional investment in the residential private rental sector and in the commercial markets is the way to go, according to Oakley, thereby ‘exploiting the caution of those who do not believe recovery is underway’.