Increased lending appetite drives diversification and specialisation in UK lending market
UK property is currently hugely attractive and financeable, according to Savills, which gave lenders a talk on ‘Challenges in a Low Return Environment’ at its 29th annual Financing Property presentation in Edinburgh today (Tuesday, 20 June).
The international real estate advisor also claims the outlook for Scotland in particular is ever improving – reinforced by 81% of lenders expressing a desire to increase their loan book in 2017, with an additional 14% wanting to maintain existing levels.
The lending market
Savills says 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 – note lending origination levels in 2016 were down by 17%. Of this origination 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, who are primarily focused on the prime market and portfolios, saw a decrease in market share, while German banks maintained their position.
Craig Timney, Head of Valuation at Savills Scotland, said: “Whilst the strong desire to lend is generating increased competition in the market, we are in a hugely multi-faceted environment where lenders are compartmentalised into niche groups focussing on different areas.
“However, with the prime sector at the top of the agenda for the majority, the balance of power sits firmly with the borrower for this type of product. As a result the opportunities for lenders is in diversifying and specialising – either remain with a low risk strategy and compete in a wider market or re-evaluate and selectively go up the risk curve.”
Savills says the overall lending market is stable with just 0.4% of loans by volume in breach and the average LTV ratio under 60%.
Opportunities to lend…
Savills 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.
Focusing on Scotland, Timney added: “The political uncertainty surrounding Scotland and in particular, the prospect of a further independence referendum has resulted in a contraction in the volume of investors looking to buy in Scotland.
“Similarly, whilst many lenders are seeking to diversify by lending on assets within the UK’s regional cities, Scotland has, of late, been considered a bridge too far. However, with the political landscape now very different and the threat of a second independence referendum receding, we hope that investors and lenders alike will be encouraged back to Scotland, particularly with some sectors trading at a discount to the rest of the UK.”