(Bloomberg) -- UK banks are preparing for a red-hot corner in the lending market as the new Labour government’s plan to address a housing shortage prompts developers to boost supply of homes.
Three prominent residential development finance lenders surveyed by Bloomberg News said they expected the outlook for housebuilding loans to improve in the coming five years, especially once Labour’s planning policies start to take effect. A surge in borrowing would provide a shot in the arm for those divisions within banks that have been weathering a slump from high inflation, rate hikes and labor shortages.
“We now have a government in place that we can expect to be consistent for at least the next five years, meaning there is more certainty than there has been for some time,” said Deepesh Thakrar, senior director of debt finance at OakNorth Bank Plc. “As a result, we expect demand for borrowing to increase.”
The UK’s ruling Labour Party, which came to power in July following a landslide election win, has put homebuilding at the heart of its plans to stimulate growth, after years of missed targets from the Conservatives contributed to a massive housing shortage.
Deputy Prime Minister Angela Rayner last month promised to make it easier for developers to build on the green belt and restore mandatory local housing targets ditched by the previous government.
UK housebuilders — many of which have long blamed planning for disrupting development — have welcomed Labour’s promises to reform the system.
“The commitment to employ 300 new planning officers is likely to be key to unlocking planning processes, getting schemes up and running and boosting housebuilding,” said Terry Woodley, head of development finance at Shawbrook Bank Ltd., which is looking to shift its focus to residential development financing in line with any increase in demand.
Since Labour’s election win, OakNorth’s Thakrar has led several residential transactions announced by the bank totaling at least £79 million ($104 million), including a roughly £50 million loan to a London-based builder for a 27-home mixed-use scheme in Queensway due for completion next year.
Thakrar said that projects are typically funded at least two years in advance, meaning the certainty of a pro-building government could provide a stronger environment for developers securing financing deals early on in the parliamentary term.
In 2023, the volume of development loans dropped in line with a wider market slowdown driven by high interest rates and a cost-of-living squeeze, according to research from Bayes Business School. However, strong institutional investor interest in build-to-rent and student housing is providing lenders with renewed confidence in development financing, especially with the former benefiting from many prospective homeowners being priced out of the market.
“More lenders, banks and debt funds are piling into residential development lending,” said Nicole Lux, a senior research fellow in the faculty of finance at Bayes. That’s “also due to capital focusing on safe assets which are considered less cyclical and recession-proof, including the living sector,” she added.
One of those lenders is Investec Bank Plc.
“Increased construction targets and improvements to the planning process should help address the UK’s systemic undersupply of housing,” said Shivani Goolab, head of private client lending at Investec Real Estate. “Although this fresh government impetus is encouraging, its success will rely heavily on interest rates continuing to fall and the stabilization of build-cost inflation.”
However, some cautioned that a recovery in development financing is likely to be a drawn-out process starting from a low base, as Labour’s proposed legislation takes time to filter through. Residential lending accounted for 51% of the UK’s total loan book value allocated to development last year, the lowest share since 2005.
Shawbrook said revisions to the National Planning Policy Framework will take months to implement, while the recruitment process and revenue generation required to fund new planning officers will also drag on. It warned that an increase in housebuilding will likely put pressure on materials and labor, potentially pushing up costs and restricting a rapid boom in development.
“We are not expecting a sudden surge following the reform announcements, but rather steady, incremental change,” Shawbrook’s Woodley said. “An overhaul of an entrenched planning system will not occur overnight, particularly where legislative change is required.”
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