The outlook for residential development finance

Good news as Brexit fails to make a dent in residential development lending. November 21, 2016 / Isla MacFarlane
The outlook for residential development finance

Knight Frank’s survey of more than 45 key operators in the development finance sector found that:

  • Lending for residential development in outer London and regional markets looks set to increase next year;
  • Over two-thirds of respondents have seen business activity increase since the EU Referendum;
  • Over a quarter of respondents expect the loan-to-value to fall as lenders look to lower their risk.

“Following the referendum result we have seen lenders, in some instances, taking a more cautious approach and reducing leverage levels by 5-10% of project cost,” said Peter Macallan, Head of Structured Development Finance. “This has resulted in more developer equity going into projects, giving lenders more comfort regarding sales risk in a more uncertain environment.

“Alternative lenders and projects have been at the mercy of their often ‘multi strategy’ investors, while some loans have been put on hold, others have been pulled altogether.”

In order to assess the residential development finance sector Knight Frank surveyed almost 50 major operators in the market. The results suggest appetite amongst lenders remains strong, despite the recent political and economic uncertainty. There remains a wide range of funding on offer, ranging from senior to mezzanine and bridging finance


London remains the primary focus for lenders, according to Knight Frank’s survey. However, central London appears to be losing its appeal. In the 2015 survey, 78% reported that they had operated in central London (zone 1). This year, that proportion fell to 60%.

While there has been a modest rise in activity in inner London, encompassing zones 2-3, it appears the South East is becoming a key market for residential development; 70% of participants had arranged finance in the region over the last year, up from 59% in 2015.

Outside London and the South East, lending activity has risen once again in both the Midlands and the North of England. This is indicative of the improving picture in both markets and increasing levels of residential development, particularly in the Midlands.


Apartments remain the most-popular option, according to Knight Frank. Additionally, multiple houses and mixed-use schemes are also prevalent. The appeal of mixed-use schemes in London is significant given the number of regeneration projects currently live across the capital.

Over 80% of respondents said they will fund build-to-rent developments, an increasingly attractive sector given its flexibility and faster build periods. Interestingly, 22% of those willing to finance a build-to-rent scheme said they would be willing to invest in developments with GDV exceeding £100 million.

This compares to 26% for blocks of apartments. The latest Knight Frank Tenant Survey emphasises the growing importance of the Build-to-Rent sector, suggesting a further £5 billion will be invested by 2020.

When asked whether they would provide finance for a scheme with planning risks, 60% of those surveyed said they would do so, provided that the viability of the scheme is not affected.

“Deal flow since the Referendum has slowed and many of the clearing banks are reassessing their lending terms,” said Sebastian Wallis, Head of Residential Development Valuations. “Credit papers and term sheets are being scrutinised to ensure that risks remain within acceptable limits.

“Despite this, we are seeing activity across all of London’s sub-markets including the core prime post codes, where the alternative lending market has filled the gap as traditional sources of development finance gravitate towards inner and outer zones of London where there is currently less sensitivity around pricing. The results of the survey suggest that this trend may continue.”

The over-riding view among lenders suggests they have adopted a bullish outlook for the market in the wake of the vote for Brexit. When asked if the Brexit vote result had led them to consider leaving the sector, the answer was an unequivocal no.

Meanwhile, in the three months after the referendum, nearly two thirds of participants have witnessed an increase in business, with only 16% seeing a fall. Of those to experience a drop in activity, reasons for this include less inward investment from overseas investors while others have noticed signs of adjustment in activity levels in London.

With Article 50 due to be triggered next year, the expectation is this will create further periods of economic uncertainty. However, given the UK’s long-term under-supply of housing, residential development remains an attractive option for investors.

Did you like this? Share it: