The respondents, which include a mix of banks, hedge funds and private equity firms, are increasingly venturing outside London, plan to grow their loan books over the next year and are more open to planning risks and higher loan-to-value lending.
The findings of Knight Frank’s latest survey mark another step on the return to a more liquid lending environment following the financial crisis, when High Street banks retreated from the sector.
Now, High Street lenders are taking the first tentative steps back towards higher risk lending through the provision of mezzanine finance, which is higher risk because it is repaid after senior debt in the event of a default.
“Some of the mainstream senior bank lenders are now providing mezzanine finance and they weren’t a year ago,” said Peter MacAllan at Knight Frank Finance. “It’s by no means in all cases and only for a select group of blue chip developer clients but it shows that the appetite for risk is growing.”
This trend is also underlined by the fact specialist debt funds are increasingly open to providing equity finance, which is higher-risk than debt finance in the event of default, said MacAllan.
The survey found that the overall number of lenders who intend to grow their loan books over the next year, with the figure rising to 78% in Q3 2014 compared to 75% in Q3 2013. Furthermore, the percentage of respondents that would consider a scheme with planning risk increased to 60% from 50% last year.
Sebastian Wallis, head of residential development valuations at Knight Frank, says: “In the last 12 months many of the traditional lenders that have very experienced real estate teams have continued to feature on lists of key residential development finance providers, not least Barclays, HSBC, Lloyds Banking Group and RBS.
“In the same period we have seen a marked increase in the number of alternative lenders that have approached us for valuation advice. Many so-called shadow banking organisations are unregulated in their lending activities and have looked to increase their lending to the residential development sector attracted by strong property fundamentals and the risk/reward profile of markets where demand exceeds supply”.
However, there is no sign banks are returning wholesale to the years of higher-risk lending that preceded the financial crash and they are now joined by other lenders including hedge funds and specialist debt funds that are attracted by relatively high returns in a world of low-yielding assets.
This increased competition has forced down the cost of debt and some 36% of respondents said they had reduced their pricing as a result of this increased competition.
However, as more lenders enter the market following the retreat of the banks, some are struggling to lend in sufficient quantity or at the returns of about 13% that they envisaged.
As a result, many so-called alternative lenders, who planned to offer higher-yielding mezzanine finance, have been forced to provide senior debt.
As these lines blur, with banks offering mezzanine finance and specialist funds providing senior debt, MacAllan warned the lending market could not become much more crowded after the transformation it underwent following the financial crisis that brought a range of new entrants.
“I have a feeling we are reaching saturation point,” said Peter MacAllan. “There are too many lenders chasing the same deals.”
Meanwhile, the sustainability of house price inflation is a concern for lenders, particularly in London, despite recent signs of moderation in pricing.
Some 83% said they would consider schemes in zone 1 of London while 89% said they would consider zone 2 and beyond. That compares to 97% who would consider schemes in any part of London last year.
Meanwhile, appetite has grown for lending in the UK regions, where the recovery has been patchier. Some 38% said they would consider lending to a scheme in the Midlands in the next 12 months, while the figure was 34% for the north of England. That compares to 28% and 21% respectively last year.
One example of a deal outside London was a 200-unit residential-led scheme in Brighton Marina, on which ICG-Longbow lent £40 million. Despite a potentially complex construction over water, the lender was comfortable lending because of the scheme’s appeal to local residents as well as people moving from London to Brighton. Aeriance, a European debt fund that has previously been focused on prime central London since 2010, is providing senior finance for the acquisition, demolition and subsequent development of 10 Luxury Apartments in Sheffield. This is further evidence of debt funds looking to lend outside of London and the South-East.
