Equity Funding 'Has Become More Important than Debt'

Using equity to fund the purchase of real estate investments has become more popular than debt financing. This is the conclusion of a report published by Savills, which revealed the proportion of property transactions that are covered by mortgages has dropped over the last decade....

Using equity to fund the purchase of real estate investments has become more popular than debt financing. This is the conclusion of a report published by Savills, which revealed the proportion of property transactions that are covered by mortgages has dropped over the last decade. In 2001, 62 per cent of the value of all real estate deals were funded by loans, while in 2011, this figure had dropped to 48 per cent. The firm noted this shift has been driven in part by banks' requirements for higher deposits on house purchases, which favours equity-rich buyers.

Savills pointed out changes to the financing landscape of the real estate sector are helping to boost housing markets in locations such as London and the south-east of England, where prices have been more stable and demand has continued to be strong. The firm also highlighted the effect this trend is having on the private rented sector (PRS), which is expected to exhibit robust growth over the next few years as first-time buyers are unable to raise a large enough deposit to purchase their own homes. The organisation anticipates that the PRS will account for 20 per cent to 23 per cent of all housing stock in England by 2016 and is expecting a rise in the number of institutional investors entering the sector as income yields improve.

In a recent interview with the Financial Times, chief executive of CB Richard Ellis Brett White explained financial institutions are coming under pressure from governments, which is making it more difficult for them to lend in the property industry. "It is not that [banks] don't want to play in the real estate market any more, but rather that they cannot as they come under so much scrutiny from their governments," he stated. Mr White added this is encouraging private equity funds to become more involved in property investment.

- Friday 10 February 2012

*This page is provided for information purposes only and should not be construed as offering advice. Flex Profit Hub is not licensed to give financial advice and all information provided by Flex Profit Hub regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.