With the vast number of lenders that have either left the market or significantly constrained their lending activities, alternative non-bank lenders coming into the marketplace should be encouraged.
Various alternative lenders are actively lending and it should be acknowledged that they are an important ingredient to a recovery.
Non-bank lenders have gone some way to raise capital and stimulate lending activity
In the broader property finance market, there is a large gap to fill as a swathe of lenders have left the market.
We have had large lenders such as GMAC-RFC, Heritable Bank, Kaupthing Singer & Friedlander, Commerzbank’s Eurohypo, AIB, Anglo Irish and Societe Generale – to name a few – that have ceased new lending. Along with this, most high street banks have constrained new lending activities.
Council of Mortgage Lenders’ statistics on gross mortgage lending are dire and paint a bleak picture of the mortgage market. In 2007 gross mortgage lending per month was £30bn. In 2011 it fell to an average of just over £11.5bn a month – just over a third of the levels seen in the years leading up to the previous peak.
There are a number of factors constraining the lending market. The fluid state of mortgage regulation is something that is no doubt having a stagnating effect. The Financial Services Authority’s Mortgage Market Review is not yet finalised, so to some extent lenders are left guessing what mortgage regulation will look like in the years to come.
There are also various macro-level issues that mainstream lenders are dealing with, such as regulation across Europe, which may impact UK lenders, the implementation of Basel III and the continuing unease about the stability of the eurozone.
It seems sensible to assume – particularly in light of the CML figures – that most mainstream lenders are focussed as much on dealing with legacy issues, reigning in balance sheets and working through the coming regulatory environment, as on aggressively increasing their loan books.
Alternative non-bank lenders have gone some way to raise capital and stimulate lending activity. At the big ticket end of the mezzanine sector there has been Duet Group, with its AIM-listed mezzanine fund, and Pramerica Real Estate Investors that are actively lending.
In bridging finance, we have raised our own fund, the Montello Income Fund, which offers investors the ability to receive a steady return of 8.5% per annum and funds a large part of Montello’s first charge loan book.
Dragonfly Property Finance has also come into the market and dominated with funding from VCT fund specialist Octopus Investments and West One Loans, which manages a collective investment scheme for private investors. All these are non-bank lenders seeking to stimulate the lending market with alternative funding models.
These lenders may be relatively small but are providing credit that may not otherwise be available to borrowers. The government is also starting to realise the important role that such lenders play. The Department for Business Innovation & Skills recently launched an independent task force on non-bank lending chaired by Tim Breedon, chief executive officer of Legal & General.
“The arguments for alternative sources of finance are strong,” the task force concluded in its initial paper. “More diverse financing gives businesses greater choice, promotes competition among finance providers, potentially reducing cost, and leads to greater resilience in the financial system. Some other countries, particularly the US, have a wider range of bank and non-bank finance options for businesses creating a more diverse and efficient market.”
Some of the task force’s initial recommendations are innovative and include the commissioning of a study into facilitating a mini-bond market that would be accessible to small and medium enterprise businesses.
It has also said that the government should look at business finance partnerships to make the launch of mezzanine loan funds more commercially attractive.
While this is still work in progress, it is positive to see these sorts of initiatives being discussed.
“The UK has one of the most sophisticated global financial centres, but finance does not fully serve the needs of smaller businesses,” the task force added. “UK businesses that use external finance are currently heavily reliant on bank lending and, as we saw during the financial crisis, there is significant risk associated with reliance on one single source of finance.”
It is hoped the market will welcome non-bank lenders as viable alternatives for funding and that regulators will appreciate the positive role many such lenders play.
There is a huge gap to be filled and if these new lenders are not encouraged, the funding gap will inevitably remain for longer and will potentially have dire consequences for the recovery of the market.