Safe as houses? Challenges and trends in the market for the changing landscape of lending
Annika Kisby and Victoria Liddell Receivership
At the peak of the last financial downturn, in 2009-2010, high street banks were under pressure to reduce their exposure to bad debt and Allsop’s Receivership team was kept busy as a result.
Fast forward a decade and times have changed. Increased government regulation surrounding lending and high street banks becoming more risk averse means the Receivers are still busy but not so much with the traditional lenders and more with the new players in the market: challenger banks, peer-to-peer lenders, property companies, private-wealth banks, mezzanine and bridging lenders.
Today’s lending landscape is far more diverse than it ever has been and, as Receivers, we are in constant dialogue and exposed to many more lenders than ever before. The varying size and number means it is easier for Receivers to spot trends and identify the areas in the market and assets most likely to struggle in the short and medium term.
This is exemplified by the now well-publicised reduction in values for prime central London residential property. Allsop’s Receivers noticed this trend more than three years ago when, having advised on several properties in prestigious London locations and spoken to agents active in the market, it became apparent that the market had thinned. Moreover, vendors were not achieving the asking prices they anticipated or, more importantly, required. The weakening of this market remained concealed with properties sitting unsold, or being withdrawn due to lack of interest. As Receivers transacting in the market, and with careful analysis and opinions from active agents, we could see this market was suffering and values had declined by a substantial amount. Moreover, the decline was not only in the number of transactions but also in the values achieved.
Although the Receivers had identified the trend, the lack of actual evidence meant that the market fall was not widely acknowledged, taking time to filter through. Local agents were reluctant when we challenged their pricing and it became evident that no agent wanted to be the first to corroborate such a drop. For example, a well-known estate agent (who will remain nameless!) once refused to put a prime asset on the market at a certain price for fear of reducing the average price for similar properties in that locale. In essence, the agents were dictating the market by maintaining artificial levels that were not being achieved. This also made it difficult for valuers, who typically rely on comparable transactions in order to provide valuations. In a stagnant or falling market, characterised by fewer transactions, comparative evidence is hard to find, and a valuer can only rely on historic evidence that may no longer be relevant, as well as market sentiment and agents’ opinions.
This happened three years ago, since then, a decline in values close to 25% has been evidenced in some parts of London. This is only one example of the trends that we have seen and that we are continuing to see. Other red flags in the market include part built development schemes, shopping centres and strategic land; all asset types that appear to be facing significant challenges.
As Receivers, we use market intelligence and experience to advise our clients. Our advice is simple: know your borrower and the asset. It is a difficult and uncertain market, lacking in liquidity. As a lender you cannot sit back and rely on comfortable loan-to value ratios (LTVs) or historic valuation reports. If the borrower is not returning your calls, be proactive, otherwise your money may not be quite as safe as you thought!
It is a difficult and uncertain market… as a lender you cannot sit back and rely on comfortable loan-to-value ratios (LTVs)