For UK lenders as well as intermediaries there is certainly a lot of potential business to go for in the rest of Europe.
Across the EU there is over £3 trillion-worth of mortgage finance and that figure is growing fast. Over the past five years, the average growth in mortgage lending has been around 9.4 per cent per annum, with the fastest growing segment being in the new EU countries.
For bridging loans, secured and unsecured debt, the picture is similarly promising. A recent report from independent market analyst Datamonitor revealed that while the UK was responsible for a third of all consumer debt in Western Europe, the rest of Europe outstripped the UK in terms of potential.
The UK consumer credit market has grown at a rate of 2.7 per cent per year over the past five years, but the Western European market has expanded around three times faster at 8.3 per cent per year. This is largely because European consumers have historically lower levels of indebtedness and have had their needs met, until recently, by fairly conservative financial service providers. Lenders in the European markets are becoming more dynamic and are tapping into the considerable potential that exists in these countries.
Looking at overseas
Aside from the potential of lending to residents of European countries, there is also the large and growing market for Brits wanting to buy abroad. This is a market that the UK financial services sector has, to date, done reasonably well from and stands to do even better from in future years.
Research by Moneycorp indicated that 68 per cent of adults in Britain – some 29 million people – would like to buy abroad. Over the next five years, an estimated five million will buy. If this figure becomes a reality, there will be one million individuals per year until 2011 looking for finance to secure their holiday home.
This market is taking in all parts of the home-buying population and is no longer limited to the retired or soon-to-retire. The price of property in the UK is prompting many first-time buyers to look abroad. With lower entry levels and the possibility of higher gains, young property speculators are hoping to make sufficient profit to raise the deposit on a house in the UK.
Professional landlords are also increasingly looking further afield to widen their portfolios. With the potential of weekly rent from the holiday market as opposed to monthly from UK tenants and steeper capital appreciation, this is becoming an attractive proposition.
The active 55-and-overs will, however, continue to provide the lion’s share of demand for overseas homes. In addition to these UK citizens wanting to buy a second home overseas, the fact that 200,000 people are emigrating from the UK each year and that they tend to be high net worth individuals looking to buy property abroad, mostly Europe, needs to be taken into account.
Given all this, it is not a surprise that many suggest financial products and services providers will, in addition to developing their proposition in UK-based markets, need to look to Europe to help them realise their expansion plans.
A challenging market
While there is undoubtedly a lot of future UK growth, it is a more challenging place to do business due to relatively higher levels of debt within the population. Additionally, both the unsecured and secured lending markets are well developed in this country and are at a higher level of maturity than elsewhere in Europe.
The considerable potential that European markets represent will come as a surprise to few in the industry. It has been evident to UK players for some time, but to date the only notable activity has been the selling of financial products to UK citizens wanting to buy abroad. There has been little movement on the part of the UK financial services providers into European markets such that they are in a position to sell products and services to the residents of other EU countries.
The expansion in this area seems to be in the opposite direction, with moves on the UK market by European operators keen to play a larger role in meeting the needs of British consumers. The most notable development in recent times was that of Banco Santander which bought Abbey three years ago.
However, expansion by acquisition has unfortunately consisted mostly of European players buying British operators. Many admit that there is likely to be little or no movement in the opposite direction for a while, given the hurdles placed in the way by European governments and regulators wanting to protect their home-grown industries.
Organic expansion
So, what about organic expansion into Europe, via the opening of subsidiaries? In contrast to expansion by acquisition, this looks a more promising route to pursue for UK operators wanting a presence on the continent.
Here also there are undoubtedly obstacles in the way, in the form of differing national financial practices, but at least here these stand a chance of being overcome by increasing EU integration.
Earlier this year the European Parliament voted to adopt a European Commission Green Paper on mortgage credit, which seeks to create a new approach to home buying by reducing cross-border barriers. Research has shown that only 1 per cent of borrowers currently obtain their mortgage and loan finance abroad, largely because of the cultural and legal barriers.
The paper acknowledges that at present there are a wide range of differences across Europe that hinder the growth of a cross-border financial products market.
Such differences include access to quality credit information, certainty of title and land registration, valuations, annual percentage rate calculation, early repayment and repossession processes, to name only a few.
The Green Paper’s key focus is to create a single, open and compatible funding market, encouraging borrowers to shop around and utilise brokers to gain access to credit from non-domestic lenders.
Despite this and other moves, there are those that think the chances of UK expansion to the continent are minimal. Paul Howard, director of intermediary sales at Portman Building Society, was quoted earlier this year as saying that expansion into Europe was not something any UK company would undertake lightly. And Jeff Knight, director of marketing at GMAC-RFC, said that while his firm had operations in other countries in Europe, he doubted whether other British lenders could pursue such a global strategy due to their size.
Despite the supposed introduction of ‘free markets’ in Europe, many companies in other sectors have found that the reality can be far from this. While free access to Europe is established via EU law, in practice local regulations, restrictive practices, laws, and the like can push up entry costs and dissuade UK entrants from setting up shop.
Little development
So, while the potential of Europe is massive, and the benefits that the UK’s more dynamic operators could bring to the party are considerable, there is the real possibility that there will be little development of this market from the UK for some years
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What development there will be is likely to come predominantly from UK citizens investing abroad. If the reports are to be believed, an increasing number of people will be looking to extract equity from their high-value properties at home to purchase property abroad.
If UK lenders and mortgage intermediaries miss out on this market, the cost to their business will be considerable. Recent figures from currency specialist HiFX show that UK residents now spend £6 billion on second homes overseas per year, compared to £2 billion in 2002, and this figure is growing.
