London’s Subterranean Luxury Manors Lure New Lender Breed

London’s mansion dwellers and their desire for cavernous new basements, subterranean swimming pools and home cinemas are attracting a wave of private lenders as banks stung by the financial crisis shun risk.

Luxury-home developer Christian Candy’s Omni Capital and Topland Group Plc are among short-term financiers ramping up lending to wealthy foreign investors seeking to buy and upgrade homes in London’s most desirable areas. The number of lenders targeting luxury property development has risen to about 50 from one in 2009, said Mark Harris, chief executive officer of Savills Private Finance Ltd. in London.

“If you’re a big-hitting investment banker at Goldman Sachs buying a big house in Kensington, you borrow money from UBS or Deutsche Bank,” Harris said by phone. “But if you’re knocking the house down and rebuilding, need the money quickly or have a background that is not as easy to validate, other lenders come into their own.”

London’s luxury-home market has surged in recent years as a weaker pound, the euro-region debt crisis and uprisings across North Africa attracted foreign investors seeking to protect their wealth. Many of the properties sought in neighborhoods such as Knightsbridge and Kensington & Chelsea are more than a century old and lack the space and amenities the richest homeowners expect.

Borrowing Costs

Short-term finance companies are typically willing to lend 80 percent of a project’s value, and will charge 15 percent, five times more than larger banks, Harris said. For wealthy foreigners, those fees are often lower than the cost of bringing large amounts of money into the U.K., he said.

Omni Capital, based near Candy’s One Hyde Park luxury apartment project in Knightsbridge, plans to lend as much as 600 million pounds ($1 billion) this year. Topland, run by billionaires Eddie and Sol Zakay, aims to increase its lending by 200 million pounds a year, Tom Betts, the company’s director of structured finance, said by phone.

“The way of securing high-end residential sites is to say that you can buy quickly,” Betts said. “The clearing banks and other funders out there have got large credit committees that take a long time.”

Topland took seven days to arrange a 36 million-pound senior bridging loan to enable LJ Group to buy a site in Bishops Avenue in London’s Hampstead district, known as Billionaires Row. A bank can take as long as two months to do a similar deal, Betts said.

Digging Holes

“The private banks, regardless of the quality of the client, are very reticent about partly built properties or ones that are going to be developed,” Harris said. “Some are very concerned about basement digs, which are in vogue at the moment.”

A “sharp rise” in planning applications for underground extensions has prompted Westminster Council, which presides over the districts of Mayfair and St. James’s, to consider restrictions on the size and depth of extensions by 2015, Robert Davis, deputy leader of the council, said on Feb. 21. Basement development tends to be concentrated in high-value areas such as Belgravia, Knightsbridge, Mayfair, Bayswater and St. John’s Wood, according to a Westminster planning document.

The council said this month it may adopt a policy of recommending that planners reject all multilevel basement additions and those that are more than 50 percent of a property’s garden size.

Mayfair Extension

John Caudwell, the billionaire founder of Phones4u Finance Plc, received approval on Jan. 14 to build a 10,000 square-foot (930 square-meter) extension to his Mayfair home, including a basement with a games room, fitness and media room, pool, spa and salon, according to a council filing.

Voltaire Financial set up a 100 million-pound fund in January to provide senior debt for luxury residential developments, citing a shortage of funding from private and publicly traded banks. The company will typically lend as much as 10 million pounds, said James Thomlinson, a partner at Voltaire. Omni Capital will advance 100,000 pounds to 100 million pounds for up to 48 months, the company said on Feb. 4.

Some of the U.K.’s biggest banks are struggling to recover from the financial crisis, creating opportunities for alternative lenders. Lloyds Banking Group Plc, Britain’s biggest mortgage lender, posted its fourth consecutive annual loss this month. Royal Bank of Scotland Group Plc today posted the biggest annual loss since its bailout in 2008. The company hasn’t reported a full-year profit since 2007, data compiled by Bloomberg show.

Pound’s Weakness

The crisis sent the pound tumbling, making it cheaper for overseas investors to buy U.K. assets such as property. Sterling is about 20 percent lower on a trade-weighted basis than it was in January 2007. The 10-year government bond yield has fallen to 2.73 percent from 5 percent over the same period.

Banks tend to be willing to provide loans covering 50 percent of the cost of a project and they are wary of lending to investors from countries where the origin of a person’s wealth is difficult to establish, Harris said.

“It’s not about lending to drug mules and arms runners,” he said. “This is about when their wealth has been accumulated in a way that global banks can’t process.”

The number of London homes sold for more than 5 million pounds increased 24 percent to 500 last year, according to Savills. Luxury-home values in the capital rose about 135 percent over the last decade, Knight Frank LLP said.

Lending Risks

New lenders entering the market today may face risks including increasing competition that is putting pressure on margins and a possible slowdown in luxury homebuying.

Price gains in London’s most desirable areas are likely to slow to 4 percent this year from 7.5 percent in 2013 as buyers avoid neighborhoods such as Chelsea and Knightsbridge, Knight Frank said in December.

There are also indications that local authorities are growing impatient with owners digging more holes in the ground.

The private banks can “get themselves into a bit of a tizz if you’re building a side extension or changing the kitchen,” Harris said. “Let’s be fair, those are works all of us do on our own houses without even telling the bank.”

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