Latest Blackstock PropCast episode digs into property finance & appetite for alternative lending
Ten years on from the collapse of Lehman Brothers, banks and regulators remain generally disciplined on real estate lending, but as part of their drive to reduce their risk are now funding less property projects by smaller developers, potentially exacerbating the housing crisis.
Banks are still prepared to lend to the big, listed builders and developers but, with their new reduced risk appetite, are more reluctant to lend to small and medium-sized firms due to the perceived risk.
“Banks have learnt their lesson [since 2008] but have probably over-corrected, especially in terms of investing in riskier activities such as property developments, which has led to a void in developments,” says Parul Scampion, co-founder of new online property investment platform propio.com, on the latest episode of Blackstock Consulting’s ‘PropCast’, a new podcast about trends in real estate. “We want to unblock some of those lending streams that have closed, which have meant that small developers haven’t been able to build as much as they could have.”
“There were a lot of lessons for everyone to learn after [the financial crisis],” said Peter Cosmetatos, the CEO of Commercial Real Estate Finance Council Europe (CREFCE). He added that “property is highly cyclical, which means you need to be careful how you manage leverage as a borrower, and as a lender you need to be careful as to when you are lending during the cycle. During the last cycle everybody got this wrong. Lenders lent a great deal into the peak [of the cycle] and were left licking wounds and dealing with legacy books for many years after the peak. It wasn’t just lenders who went off the rails, regulators fell asleep at the wheel.”
This overcompensation has led to a funding blockage that could have implications for the ongoing UK housing crisis and the government’s ambitious housing targets of building 300,000 new homes a year.
“Finance is a utility and we need to build houses in this country. There might be risk associated with development, but as long as the reward is appropriate it’s a good thing. Otherwise, we will not be able to address the acute shortage of housing,” said Parul Scampion, co-founder of Propio.
In the past smaller developers would have picked one of the many high street banks as their lender for a project but today – in response to tighter lending by most banks – a number of challenger banks, bridging finance firms and crowdfunding platforms have emerged to fill the gap and disrupt the lending industry.
“It’s a difficult world to navigate because now there are hundreds of lenders that you might go to. But now there is a real role technology can play in terms of connecting people looking for debt and those who could provide it,” Peter Cosmetatos, the CEO of Commercial Real Estate Finance Council Europe (CREFCE). “There is an opportunity for online platforms that can aggregate and show what offers are available, while such platforms can also be used by capital providers to find out what is available and where they can put their money.”
Scampion and Cosmetatos both agree on the need for further development within the UK market and that alternative lenders are vital for filling the development funding void created by the conservative lending regimes currently in place at many more traditional lenders. Peter Cosmetatos noted that “the most useful thing the property industry does is building new stock for which there is an economic need. That is more important and more valuable than simple transactional activity when existing buildings get traded. That doesn’t generate value for the wider economy but new construction absolutely does.”
It’s still early days, but the new breed of lenders is carving out an important position for itself in the development finance market, enabled by new intermediaries helping to connect them to debt-hungry smaller housebuilders.
Listen to the full episode of PropCast, and all out other episodes HERE.