Like many people working in real estate lending, I enjoy the rare moment provided by the Bayes Business School to look under the hood of this notoriously opaque part of the sector.  

As a non-bank lender, relatively new to the sector, I found myself agreeing with many of the findings of the recently published H1 report.  

For a residential lender such as us, it was a curious start to the year, with a falling base rate, low transaction volumes and an increasingly competitive market having a noticeable impact on returns. 

Yet despite this, we continued to transact and took the decision to increase our stake in the market, with a view to deploying £900m into the Living sector over the next 10 years.  

The banks are back 

Whilst I would like to think we are an agile business, able to leverage the benefits of being a private company to respond quickly to market opportunities, the data shows we are far from unique, and that non-bank lenders now comprise 43% of outstanding CRE loans. 

When you dig into the residential development sector however, the UK banks provided the vast majority of new loans in the first half of the year.  This is perhaps the most significant difference to our experiences in 2023, reflected in previous surveys, where it was clear the banks had retrenched, leaving an opportunity for alternative lenders.   

Opportunities for all?  

Even with the UK banks returning, we still see opportunities for non-bank lenders and expect to continue to see robust yields, due to the strong fundamentals underpinning the living sector.  

In general, CRE lending yields are likely to remain higher than in much of the pre-Covid period, with base rates unlikely to return to where they were in the 2010s or loan margins falling to the extreme lows of the pre GFC days.  

Green shoots in the housing market  

And there are other reasons to be cheerful.  

Investor allocations to the living sector are increasing; it continues to be seen as resilient and scalable, with opportunities for growth.  Stabilising interest rates and expected growth in capital values is leading to increased liquidity in the market, and further significant equity raises have been reported this year across both BTR and PBSA. 

Alongside stabilising development costs and a pro-development government, this outlook should provide developers with confidence to bring forward more schemes into an undersupplied market. It was also encouraging to see the Prime Minister re-committing his determination to address the UK’s sclerotic planning system at the recent international investment summit.    

Notwithstanding the most anticipated Budget we have seen for years on the horizon, we continue to be reassured by the strong fundamentals underpinning the housing market, consumer confidence appearing to be on an upwards swing and inflation data looking positive.  

Looking forward  

Whilst the delivery of completed homes has been increasing year on year, the rate of new development starts has been falling over the past two years. We are optimistic that these green shoots should now translate into healthier profit margins for developers, firing the starting gun for a wave of schemes to be brought forward.   

Looking forward as a lender, with average loan default rates increasing slightly to 4.9%, the survey provides a reminder that it will be even more crucial to identify the best partners.  

For us, that will mean remaining agile as we look to add to the 3,200 homes we have supported to date. As a developer in our own right, with nearly 350 years of experience, we’re better placed than most to manage these market cycles and understand the needs of developers during these moments of transition.  

Our strategy will continue to be to remain open to a wide range of tenures in the living sector, but also expanding our initial focus on debt to look at different lending options.