London lenders send interest rates surging amid worries
Lenders are charging higher interest rates for development loans for London luxury homes as slumping commodity prices and increased taxes deter overseas buyers, fuelling concern the market is oversupplied.
Debt funding construction of the costliest homes has increased by about 75 basis points to 3.75 percentage points over benchmarks since January, said Randeesh Sandhu, chief executive officer of residential development lender Urban Exposure Real Estate. For large projects in central London, financing costs have risen the most since 2012 over the past six months, said William Newsom, a senior director at broker Savills.
"Everyone is freaking out," Sandhu, whose firm has loaned close to £1bn (€1.27bn) to developers, said in an interview. "There has been nervousness for a while in the super prime market and there is also now nervousness in prime."
Developers are constructing or plan to build about 54,000 homes in central London, according to data compiled by researcher Lonres last year, just as demand and values fall.
Home prices in the UK capital's best districts fell the most since June 2009 in the six months through February, according to broker Knight Frank, as higher stamp duty sales taxes and turmoil in financial markets deterred buyers. The stamp duty for a £7.5m residence to be used as a second home is now more than £1m.
The sales market for homes valued at £2,500 a square foot or more "is on its knees," said Mark Posniak, managing director of Dragonfly Property Finance, a lender which has advanced almost £2bn to borrowers since 2008. "When you start talking about stamp duty going over £1m on a property, it cripples the market."
Dragonfly is now avoiding financing the development of the largest and the most expensive luxury homes, Posniak said in a telephone interview.
It has also reduced the amount it will lend for the construction of a luxury homes project from around 85pc to 80pc, he said.
Pluto Finance (UK), the specialist high loan-to-value lender backed by funds managed by Blackstone Group, has avoided advancing credit for projects in central London since 2013 because of oversupply fears and the market's dependence on overseas buyers, co-founder Justin Faiz said in a telephone interview.
"The mainstream lenders appear to be very cautious and I think with 'Brexit' on the horizon no one wants to push the boat out too far," said Dragonfly's Posniak, referring to the UK's vote in June about leaving the European Union political bloc.
Average interest rate margins for UK housing developments fell to 381 basis points from 453 basis points in the 12 months through June, according to a survey of lenders by De Montfort University.
Some UK banks have a reduced appetite for development loans because they are required to hold significantly more capital against that type of credit compared with investment property, said Ion Fletcher, finance policy director at the British Property Federation.
Barclays is continuing to lend to high-end developments based on each project's merits, said Brendan Jarvis, a managing director and head of real estate for Europe, the Middle East and Africa at the bank. Royal Bank of Scotland and Lloyds declined to comment.
At least one small lender views the reduced competition as an opportunity. Fortwell Capital, a company backed by high profile developer Christian Candy's CPC Group, is hiring three staff to lend money to the luxury residential development market, according to spokesman Bob Burgess. Candy developed the One Hyde Park apartment project in Knightsbridge as part of a venture with closely held Waterknights.
Others are less enthusiastic.
"We are one of a number of lenders who are nervous about central-London residential development," said Faiz at Pluto.
"You have a market that looks a bit out of kilter." (Bloomberg)