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Lenders show increased interest in financing developments

After years of caution, banks and associated lenders are once again turning to property development, after an increase in real estate markets in several parts of the world.

Research into the intentions of investors has shown that lending to the property developer market has increased by a third, to around £10bn in the last year. Research conducted by the independent group The Investment Property Forum has revealed that the most significant increase has come from the alternative lending industry, including debt funds and institutional lenders.

They have shown a marked increase, as their investments have jumped by over 50% this year, to nearly £4bn, according to these reports. The next biggest increase is from British banks, whose £4.6bn investment shows an increase of 15%. Other investment from overseas banks sees the total investment for this year rise to £10bn.

The interest in property investment has reached all areas of property lending in the last few months, the IPF states. Development lending, which is the riskier portion of property financing due to problems that can occur within unbuilt property schemes. These could range from issues with planning permissions, struggling to find tenants or buyers, or excessive increases in the cost of construction which mean that it goes outside of the investor's budget. The fact is that the current market has a low-yield, and that makes it more interesting for investors who want high returns for their money.

The largest developer listed in Britain, Land Securities, announced last year that it didn't intend to begin any further property development after the late 2016 period, unless there were already tenants signed up for those buildings. This announcement is considered to be a cautionary signal to the property development market, but has already attracted some criticism from other analysts, who consider it to be an overly conservative stance.

On the other hand, alternative lenders in particular are really keen to start riskier deals, at a higher ratio of debt/equity, as they tend to create higher returns, as the IPF discovered. They are also choosing to move quickly in residential developments, capitalising on the current housing shortage in Britain. Only just over 140,000 homes were built last year in the UK. Both the Department for Communities and Local Government, and economists have agreed that the increasing population of the UK requires at least 200,000 newly built houses every year, and less conservative estimates suggest that the real amount is over 300,000.

Kate Gimblett, Author of IPF's research, has said that the banks were being much more cautious than newer market entrants such as alternative lenders, when choosing to finance new development. Banks are still the dominant force in senior lending, including financing pre-let and sold developments, Gimblett added, with alternative lending platforms and dept funds providing more of the speculative funding for building projects.

International regulations for banking were also playing an important part in this revealed pattern, Gimblett stated. Basel II regime for banking rates development lending as being very risky, and often has extra requirements on the banks which have more capital held in this type of lending. The extra demands make it difficult for banks to provide finances for risky development and property schemes.

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However, despite the fact that there is now more funding in general, one area of the development market is still missing out on opportunities: the small developer. Few banks, debt funds or alternative lenders are keen to lend to small companies, the IPF found. There may still be a glimmer of opportunity, however, in peer-to-peer funding, which is particularly open to small schemes, and is growing quickly. The IPF said that this year, more than £85m will be raised for property development via the peer-to-peer platform. Small developers may also be able to benefit from The Housing Growth Partnership, a £100m fund set up for small property developers and house builders by a partnership between Lloyds Bank and the Government which we reported on last week.

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