January 28, 2020 / 12:27 PM / 13 days ago

CORRECTED-UK real estate back in vogue for lenders

(Clarifies that £600m of deals advised by Ropes & Gray in fifth para.)

By Kerstin Kubanek

LONDON, Jan 28 (LPC) - UK real estate has become an increasingly attractive proposition for cash-rich lenders in the wake of the UK elections, offering investment diversity and yield.

A number of lenders pulled back from investing in real estate in a meaningful way most recently in the aftermath of the Brexit referendum in 2016. However, clarity over Brexit following the UK election in December saw a number of lenders jump straight back into the asset class.

“With the outcome of the UK general election in December investors got the decision they were hoping for,” Jamie Johnson, CEO of FJP Investment, said.

Prime Minister Boris Johnson’s government secured a majority in parliament, which enabled him to proceed with the plan of leaving the EU.

December 2019 became one of the busiest periods in UK real estate in three years, with around £600m of London City office deals registered that Ropes & Gray advised on, according David Seymour, Partner at Ropes & Gray.

“The development of the UK real estate market we have seen in the last three years was not normal. Investors were on hold. A good number of investors have resumed funding in the UK market after the election,” Johnson said.

HIGH YIELD

Direct lenders are attracted to the higher yielding investments that real estate has to offer. They are also attracted by the opportunity to source bespoke deals, as an alternative to the highly competitive syndicated loan market.

One of the larger private debt funds is working on a £300m debt deal for an office building in London – a former JP Morgan office — which is set to complete by the end of January, sources said.

“The fundamentals for a variety of sectors in the property market are strong and the returns relative to other alternative assets make it attractive for investors, particularly in the ongoing low interest environment,” David Christie, head of ESO Real Estate said.

With a newly awakened appetite for UK property and a lot of pent-up cash to put to work, funds are diversifying beyond traditional investments into a number of alternative assets such as the private rental sector and Built-to-Rent schemes.

“Debt funds are also looking at alternative real estate such as student or senior living. In terms of market trends we expect offices and logistics deals and warehousing to continue to be of interest for direct lenders,” Seymour said.

Direct lenders have managed to carve out a space for real estate lending after a number of banks retreated from the market following the financial crisis in 2008/2009. Although many banks have now returned to the sector, they face increased competition and regulatory restrictions.

Around 40% of debt origination in UK real estate is provided by direct lenders, a lawyer said.

Being absent from property lending for more than 10 years has left a mark on banks. They liquidated their origination teams and infrastructure which is an important necessity in the real estate business. Risk weighting on the loans might not work for banks either, LendInvest CEO Rod Lockhart said.

Direct lenders enjoy more flexibility than banks when it comes to terms and documentation and can act more quickly, a lawyer said.

“There is huge opportunity in the property market at the moment,” Lockhart said. (Editing by Claire Ruckin)

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