Despite many ups and downs in the financial markets over the past 12 months or so, commercial real estate debt liquidity has never dried up in the UK thanks to the presence of a diverse lender base willing to lend on assets. Like in many other real estate sectors, however, the pandemic has accelerated a trend already present pre-Covid-19: namely an even greater expansion in the sources of alternative capital available in the market and the arrival of new non-bank entrants.

It’s been widely reported by the real estate press that there are over 250 lenders in the UK, a number we see growing daily. Given the broad range of debt providers now in the market, it can be hard to know where to turn, and, perhaps unfortunately for those wanting an easy answer, there is no standard response to the best debt solution for any given situation. But alternative capital is playing an increasing role and can hold numerous attractions.

Traditional bank lenders and insurance companies lending from their own balance sheets or funds are constrained by regulation that dictates capital allocation based on headline metrics such as leverage, interest cover and debt yield. Their longstanding dominance of the real estate lending market is being increasingly challenged by the growing availability of alternative capital which is more flexible in its approach to risk, and more able to combine the assessment of traditional metrics with more subjective views on a specific situation to price that risk accordingly.

While historically many of these alternative lenders have been seeking 4-5 per cent margins on real estate investment loans, the market has changed and we now regularly see interest from non-bank lenders in the 2.50-3.25 per cent range. Across multiple sectors we have found that these lenders have provided significant amounts of additional leverage or structural flexibility for only a modest increase in cost. In addition, we have had discussions with more than 30 of these lenders who can also lend and hold over £100 million with no requirement to syndicate which is larger than many banks can hold.

As such, non-bank finance can be a competitive option on some projects. Selecting the right option though, from a debt market that continues to evolve at pace, is the challenge. As borrowers navigate the increasingly complex opportunities available it’s essential that they examine their options with a fine toothcomb. 

Further information

Contact Charlie Bottomley

Contact Savills Capital Advisors