Alternative Credit Investor hosted a webinar, supported by Kuflink, focused on the UK property market and investment opportunities within peer-to-peer lending. Stakeholders are moderately optimistic but planning reforms remain high on the wish list. Kathryn Gaw reports…
The UK property market is in the midst of a long-awaited recovery. According to Knight Frank, house prices are up by around a fifth since the last general election, and housebuilding is being listed as a key priority for every party on the election ballot this year.
However, challenges persist in the property lending sector. Issues around affordability and lack of new housing have squeezed the residential property market; while a persistently high rate environment has led to a higher risk of borrower defaults. And then there are the costly delays in planning permissions, and the limitations of regulation.
Meanwhile, it is becoming increasingly clear that peer-to-peer property investors will not simply be content with market-beating returns. According to the results of an exclusive Alternative Credit Investor survey, investors value portfolio diversification, data transparency, collateral and the reputation of the company’s management.
On Thursday 13 June, Alternative Credit Investor co-hosted a webinar along with Kuflink which brought together a panel of UK property experts to discuss these ongoing challenges and the opportunities for investors and borrowers alike.
The webinar was led by Narinder Khattoare, chief executive of Kuflink, Andrew Caracciolo, a broker at Tapton Capital, and Anna Ward, associate and senior analyst at Knight Frank; and moderated by Suzie Neuwirth, editor-in-chief of Alternative Credit Investor.
Over the course of the morning, the panel discussed the ins and outs of UK property lending, and how the sector is likely to change in the year ahead.
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“Affordability is the hot topic,” said Ward. “Obviously, both sides of the fence have promised to ramp up house building. But in terms of how realistic that is, the indicators that we track at Knight Frank do suggest that their targets are probably quite unrealistic.
“We’ve seen planning permissions fall to a decade low. In terms of what would be coming out of the ground, I think it’s pretty unrealistic. But equally, It is a pivotal moment for the house building sector, and we should at least see a bit more momentum and a bit more confidence as well in the market, particularly as interest rate cuts start to come into view.”
Kuflink’s Khattoare agreed that planning issues represent one of the biggest challenges for P2P property lending. The government has set a target of building 300,000 houses per year, yet this target is unlikely to be met.
“We’ve worked with a number of developers who are having major challenges with council planning rules,” said Khattoare. “The planning laws need to change.”
Tapton’s Caracciolo echoed the need for better planning processes, revealing that very few private equity firms are now willing to work on any property projects which are in the pre-planning stage, as it represents too high a risk.
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The panellists also agreed that rate reductions are likely to come into force later this year, and this will have a knock-on effect on borrowers and investors. Over the past decade, UK property has seen some unusually low rates, with mortgage offers as low as 1.95 per cent at one point, and bridging loans being offered at as little as six per cent.
But barring some unforeseen financial event, we now appear to be squarely in the midst of a ‘higher for longer’ interest rate environment. In June 2024, the Bank of England maintained the base rate at a 15-year high of 5.25 per cent. While rate drops are expected towards the end of the year, lenders have been forced to adapt to these new market conditions, raising rates for borrowers in turn.
Caracciolo believes that these higher rates have led to more creativity in the lending sector.
“We’re seeing them become a lot more amenable to more unusual structures in how the developers are going to fund the deals, deferred considerations being one of them,” he said.
“Previously, if a developer was seen to be doing that, lenders would be pretty uneasy about the concept. We’re seeing that really opening up now because they accept that it’s got to be done to make it viable.”
Higher rates means higher costs for borrowers, and higher returns for investors. However, Khattoare urged investors to look beyond the interest rates on offer when choosing which property loans to back. Instead, he has encouraged diversity with a mix of locations and risk profiles in each property loan portfolio.
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Alternative Credit Investor’s survey found that investors are largely in line with Khattoare’s philosophy.
Just 38.1 per cent of respondents said that higher returns were the most attractive element of an investment. Instead, these investors valued data transparency and diversified risk above everything else, with collateral and the reputation of company management also scoring highly.
These responses didn’t come as a surprise to Khattoare.
“We are seeing that people are looking to diversify their portfolios,” he said. “We’ve seen a shift from our investor database where they were investing into individual projects. Now they’re diversifying it, spreading it across a number of different types of loans.”
“Collateral has been a huge thing for our clients, particularly on the lending side,” agreed Caracciolo.
“I think it’s really essential to make sure you’re fully informed on that when you’re going into these investments.”
When asked to predict what the next 12 months had in store, the panellists were circumspect, with new opportunities on the horizon, and the possibility of a new government in a matter of weeks.
“The sentiment is definitely improving,” said Ward. “Demand is picking up slightly, but it’s really just down to that performance in second half of the year. I do think we should see a massive improvement once the election is out of the way and the Bank of England starts cutting rates.”
“I think the sector is going to be fairly buoyant,” added Caracciolo. “If we do get these rates decreased, it’s going to help on the viability of schemes and the affordability for the end purchaser.
“As improved market sentiment trickles down, perhaps that will feed into the valuers who are particularly pessimistic. A lot of the loans which we do are plagued by down valuations at the moment. There’s still a fair bit of pessimism on that side of the market. So hopefully that will lift and be in a good place.”
For Khattoare, steady growth is expected in the UK property market, with pockets of high growth in some regions.
“If we’re going to see any growth, it will be very steady growth,” said Khattoare. “I do still think there will be an interest rate cut, but I think it’ll be more or less the same. I’ve seen a bit more stock coming back on the market. But I think the key thing here is the election.”
Stability would be a welcome tonic for alternative property investors, but the panel discussion and survey results show that these investors are sophisticated enough to assess their portfolio risk and maintain diversity to offset any potential losses.