The market may have peaked but factors that were present before the 2007 crash are absent today, according to a presentation by Savills in Manchester on Wednesday.
Referring to presentations from the last 20 years, past mistakes are largely not being repeated, Savills says, although there are some potential risks if an unexpected interest rate rise triggers an increase in the cost of borrowing.
The firm said regulatory reform has been a positive force, leading to 180 new property lenders from a range of backgrounds having entered the market since 2013, contributing to an increasingly diverse, balanced lending market. By the end of 2015, insurance companies and alternative lenders had grown their shares of the market to 16% and 9% respectively. Savills forecasts that these will increase to 18% and 13% by the end of 2016, while the German banks, North American banks and other international banks will retain a 13% share each.
The market share of the UK clearing banks is forecast to decrease from 34% in 2015 to 30% by the end of the year, compared to 70% at their 2008 peak. This is due to the banks’ increased regulatory responsibilities, which has increased the cost of capital while slowing the decision making process, but fundamentally has had a positive effect on the market, Savills says. Indeed, proportionally UK banks are still the most active in the market, with RBS being the biggest lender of 2015 according to research by De Montfort University.
Jonathan Langstaff, valuation director at Savills, said: “Looking back at many years of presentations, it is extraordinary to recall that in 2007 64% of all the lenders DMU spoke to thought an 80% LTV was ‘no risk’; something that, happily, we can’t even conceive of today. Regulatory reform has had the desired effect, diversifying the market and allowing new entrants including the alternative financiers, who Savills believes are set to lend approximately £7.5bn by the end of the year, which is some 50% higher than reported by DMU. Overall such lenders are not financing speculative development and therefore are not bringing extra risk into the market. There are now property owners who have a strong preference to borrow from alternative lenders due to a perception that they are faster, skilled and offer greater certainty of delivery. Borrowers are prepared to pay a higher interest cost for these advantages.”
Langstaff continues: “LTVs have decreased since 2015, although if mezzanine finance is included, this is capable of pushing total ratios to above 80%. This is of potential concern, but with the cost of money at a record low it can be comfortably achieved in today’s market. The issue comes once the cost of money rises. Once it goes up it’s a whole new paradigm, but some businesses are being built around the premise that today’s low cost environment will continue indefinitely which, frankly, it won’t.”