With an estimated £160 billion lending gap in the UK (with much coming from property loans that need to be renewed upon expiry) there were high hopes over the last couple of years that Insurance companies, awash with funds, would become ‘the cavalry’ and fill the gap left by reticent bankers. Where have they got to?
I recall resarching this market on behalf of a client needing a significant refinance package. There was an impressive list of potential lenders but this is not an easy source of finance to break into. The reasons are partly because there are some real challenges for insurance funds in this market. These include:
- The regulatory ‘Solvency’ rules have proved to be less supportive of property loans than it was originally expected.
- Many insurers have ‘general’ funds that demand a high level of liquidity for unexpected payouts – and committing funds to long term, illiquid, mortgages just doesn’t fit with their investment model.
- For others with surplus funds, the adventure of getting into property lending on any scale is seen as too much of a break from their traditional investment strategy and they are not prepared to put the investment in to build the expertise needed.
- High expectations were there for overseas insurance companies to break into the UK. Indeed the change of regulations previously constraining the Chinese funds are now seen as the exciting new prospect. However setting up a commercial lending business in another country is very risky, has high start up costs and involves a long term commitment. Many seem to have just held back from making that step, not least as most have a surplus of domestic opportunities.
The reality therefore is that there are insurance funds out there that will be active lenders, but not on the scale originally thought. Those that are in the market will have more than enough propositions to handle and can cherry pick those that present low risk, low assessment costs and maximum returns over a period that matches their funds objectives. The lucky borrowers should however then enjoy a long term relationship with a reliable partner whose model is to lend on straightforward terms, over a long term and often at basic fixed rates.