UK banks have halved their lending to property developers over the past two years, in an effort to de-risk their balance sheets.
According to new data from peer-to-peer property funding platform Saving Stream, bank loans to property developers fell from £32.5bn in April 2014 to £14.9bn in April 2016.
Meanwhile, alternative financing options have entered the mainstream, as property developers seek new sources of capital.
Liam Brooke, co-founder of Saving Stream, said:
The days when banks dominated the property development lending market are well and truly finished – it’s now just as likely to be a debt fund, high net worth individual or a peer-to-peer lender that gets the spades in the ground. This kind of lending is something that banks would still like to do, but the regulatory restraints that have been put on them mean it isn’t viable for them.”
Since the 2008 financial crash banks have been under increasing pressure to de-risk their balance sheets and reduce their debt exposure in order to meet new capital holding requirements.
According to Saving Stream lending against property development is still viewed as a ‘speculative’ investment by many risk-averse banks.
By contrast, large debt funds are able to step in with financing offers for big property developments, while peer-to-peer lenders can offer favourable terms for small and medium sized developments.
Furthermore, peer-to-peer investors are able to benefit from higher investment returns which are no longer available through banks.
“Peer-to-peer lending is now playing a critical role in getting these developments underway,” adds Brooke. “With interest rates on ISAs still bumping along the bottom, the opportunity to get up to 12% returns on a loan secured against property is something a lot of savers are waking up to.”
However, alternative financing brings its own risk. Peer-to-peer lenders such as Saving Stream are currently regulated by the Financial Conduct Authority and most independent platforms will hold a ‘provision fund’ to cover any shortfalls.
But as with any investment, there is no guarantee of profit and peer to peer investments are not necessarily covered under the Financial Services Compensation Scheme.