Lenders are increasing their loan books but remain cautiously fixated on refinancing existing customers and offering new money to only the safest, most prime developments, according to Savills research.
Savills addressed invited guests at its 29th annual Financing Property presentation at Manchester Town Hall, themed ‘Challenges in a Low Return Environment’. The property adviser highlighted that with the spread between the all-in cost of money and UK all-property equivalent yield, UK property is currently hugely attractive and financeable. This is reinforced by 81% of lenders expressing a desire to increase their loan book in 2017, with an additional 14% wanting to maintain existing levels.
However, much of this lending appetite is focussed on the prime market, which has generated increased levels of competition due to a lack of available product.
Figures from a survey by De Montfort University, sponsored by Savills, noted lending origination levels in 2016 were down by 17%. Of this only 39% was targeted at new acquisition lending with refinancing increasing to 61%. UK banks and building societies increased their market share from 34% to 47% in 2016, with refinancing activity likely to be a contributing factor. Insurance companies and North American banks, which are primarily focused on the prime market and portfolios, saw a decrease in market share, while German banks maintained their position.
Jonathan Langstaff, valuation director at Savills Manchester, commented: “There has been focus on London and the South East, but it is a crowded market with a reducing availability of prime stock to finance. In Manchester, we have already noticed a trend of lenders visiting to see the city centre first hand and assess what is happening. The MediaCityUK project in Salford Quays has attracted lots of curiosity and acted as a beacon of what can be achieved in the regional markets, by creating an asset with national and global appeal.
“It is evident that lenders are seeing opportunities in the regions, and Manchester in particular, if they are to maintain loan origination levels. The significant amount of new development and major refurbishment projects taking place in Manchester city centre illustrate that finance is available and there are development pipeline opportunities which are also in the market for finance. These developments will also trade as investment stock once completed, giving more opportunities for lenders. 101 Embankment, which was pre-let to Swinton Group just prior to practical completion at the end of last year, is a prime example.”
Savills notes that the overall lending market is stable with just 0.4% of loans by volume in breach and the average loan-to-value ratio under 60%.
The adviser highlights the main opportunity areas for lenders are:
- diversifying by sector
- looking to regional cities
- reducing the size of the target loan
- considering good secondary products
- extending focus to emerging players in the market
- and refinancing.
Whilst the firm notes that each of these areas comes with its own cautions, the structural shifts in several markets have given rise to a range of new lending opportunities.
Prime assets and those in London continue to be attractive to investors who can hold their position for the medium-to-long-term and are comfortable with stable, albeit comparatively low returns, says Savills, but there are opportunities to secure income which out-performs the market.
Mat Oakley, head of UK and European commercial research at Savills, said: “Prime will always hold its attractions but investors who are prepared to move up the risk curve may find opportunities in UK regional offices where rents are rising and growth is less volatile than in London, or in alternative assets, such as pubs, which provide secure income. The North West has been the number one pick for non-domestic investors venturing outside London in 2016 and 2017, with overseas buyers accounting for 40% of all commercial property acquisitions in the region.
“Across all investor types, demand in the North West has been strongest for offices, with 28% of total acquisition), alternatives, at 23%, and industrial, 21%. In Manchester, in particular, upward pressure on prime office rents continues to raise opportunities for refurbishment. Outside London and the South East it tends to be a lender’s market, but borrowers looking at the regions are likely to find a broad range of niche lenders and alternative financiers willing to loan to those who have done their homework.”
In terms of residential, Savills notes that the London market has cooled in response to Government tax policy, but there is increasing pressure to boost housing supply across a range of tenures particularly in the professionally managed sectors of the market.
Edward Green, residential research analyst at Savills, comments: “Private renters aged 24-44 have increased by 1.3 million in a decade, driving demand for more housing across different tenures including built-to-rent homes. Although there are approximately 48,000 BTR units in the pipeline there is huge growth potential for investors given the stable long-term returns on offer.
“Similarly there are over a million debt free owner-occupiers over 65 in the UK, yet there are gaping holes in the market just waiting to be filled by a range of solutions, offering an opportunity to investors and ultimately lenders, but also creating more housing supply, freeing up family housing, and supporting more elderly households.”