The availability of finance has been regularly cited by the UK residential community as a key factor in the sub-optimal levels of housebuilding since 2008.
But the landscape has changed hugely in the past 18 months, with a wall of capital aimed at residential private-rented sector and build-for-sale schemes.
Debt markets are pivotal to deal structures and maximising investor returns and are currently characterised by increased liquidity. Since the downturn, the UK market has been dominated by the UK clearing banks and niche lenders. The clearing banks remain active in the senior debt market, with leverage to around 65% of costs with margins having settled in the low 3% range for experienced developers with de-risked schemes.
The niche lenders, such as Pluto Finance, Titlestone and Close Brothers, have typically offered higher leverage and greater flexibility in exchange for premium pricing and constraints around ticket size. These lenders all remain active. However, the market is now buoyed by new entrants, including European and Asian banks and North American debt funds. These funds have appetite to offer stretched debt and whole-stack solutions, up to 80% of development costs, and crucially have an ability to underwrite and hold large-scale tickets of more than £100m for development.
This liquidity is not just for London and the South East, with improving economic conditions and a lack of available sites and stock in London seeing developers, investors and financiers looking for opportunities in key regional cities. The reduction of perceived risk in the regions is shifting investment strategy to the established regional centres where PRS investors in particular are seeking build-to-rent opportunities and are forward purchasing stock. The access to equity and debt is enormous, which produces opportunities for landowners, developers and housebuilders in the UK. Sourcing the best financing stack is clearly key to maximising land value and profits.
We believe current liquidity in the capital markets will continue, particularly due to the systemic supply shortfall in the UK housing market and the diversity of institutions in the residential funding arena. There are more institutions seeking to access residential development and investment schemes than at any point since the demise of Lehman Brothers. The key is knowing who is open for business and on what terms.