Good afternoon, and thank you for joining this afternoon's webcast, which will focus on another of our specialist lending businesses: real estate finance. Before we start, I'd just like to bring to your attention the normal disclaimer notice which is on screen now. At our last Capital Markets event in November, we updated you on the significant progress we had made as a group and outlined the pathway of what is required to achieve a priority financial outcome: a 14%-16% return on average equity. We also had a more detailed look at our excellent V12 Retail Finance business. You heard from the leaders of that specialist business about their proven track record in leveraging our proprietary technology platform to scale the business and deliver cost efficiencies.
They also explained the strategic shift that had been made to focus on developing relationships with retailers who offer interest-free credit as a core part of their sales strategy. This has allowed us to improve the credit risk and quality of the portfolio. The opportunity and ambition for further growth was also explained. Today, we will focus on our real estate finance business. After some introductory comments from me, I will hand over to Managing Director Geoff Ray and colleagues John Griffin and Chris King. After the presentation, we will have time set aside as normal to take your questions. For those less familiar with Secure Trust, having exited a number of subscale businesses, we are now a more focused specialist lender.
We have made significant progress over the last three years and grew net lending by GBP 1.1 billion since the end of 2020, and we see further growth potential in our large addressable markets. We have been able to support lending growth by extending a range of saving products to serve a broader range of customer needs. Total deposit balances have grown by GBP 900 million over the same period. We are equally focused on managing our costs in support of our financial targets, and we see opportunities to continue delivering operational cost efficiencies. Earlier this year, we upgraded our ambition for our Project Fusion cost optimization programme to GBP 5 million of annualised savings by the end of this year. We are making solid progress towards achieving our GBP 4 billion net lending target that will support an attractive return on capital.
We have five medium-term financial targets, and we continue to build good momentum towards achieving these. We grew our lending by 52% in the three years to the end of 2023. We required around 20% growth to get to GBP 4 billion of net lending, so a lower rate of growth annually than we have a track record of delivering. We plan for our net interest margin to come down as we scale the business lines and focus on increasing the mix of lower-risk lending in our consumer businesses. We remain comfortable with our target for net interest margin to be around or above 5.5%. We have delivered a 600 basis points improvement in our cost-to-income ratio in the last two years. As we continue our growth trajectory and deliver further benefits from Project Fusion, we will see this move to our target level.
We delivered an increase in our return on average equity on an underlying basis last year, and this remains our key financial priority. As you know, we will continue to consume capital as we deliver additional lending growth. That will remain a feature as we keep growing our businesses until we achieve the GBP 4 billion loan book threshold. We also strengthened our capital position last year with a Tier 2 bond issue. Our medium-term target for CET1 ratio is to remain above 12%, which is comfortably above our minimum regulatory requirement of 9.6%. As you can see on the bottom half of this slide, we are crystal clear on the level of loan book scale and other metrics that are required to deliver attractive mid-teens returns.
That requires us to deliver lending growth at a lower rate than our recent track record to get to the GBP 4 billion, maintain our credit discipline, deliver a small shift in the mix of lending towards our consumer businesses, and to keep control of cost growth. We remain confident in our ability to do so. The group then becomes capital accretive, and we will have different options to consider and choices to make. Our core purpose is to help more consumers and businesses fulfill their ambitions. This provides clarity of direction and is the common focus in each of our diverse businesses, even though they operate in a range of large specialist lending segments. Real Estate Finance serves business customers, not consumers, and today's presentation will bring to life what we offer and also what we don't offer.
Having delivered growth of 18% since the end of 2020, the business had net lending balances of GBP 1.24 billion at the end of 2023. Although we do serve a very different customer in real estate than in retail finance, I'm sure you will recognize similarities today: the same focus on helping customers, a deep understanding of the market, the importance of relationships, disciplined risk management, and the opportunity to capture further growth. The team are property finance specialists managing complex transactions. They have a track record of delivering growth in tailored specialist property lending. The operating model is low-cost and scalable and generates attractive returns. Geoff will explain the sheer scale of the market, which is why we see further opportunities for profitable loan growth in this specialist business. So let me now hand over to Geoff initially to explain more about the business.
Thank you, David. Good afternoon. My name is Geoff Ray, Managing Director, Real Estate Finance. I'm joined today by John Griffin, who runs our largest team in London, and Chris King, who is Head of Credit for the Real Estate Finance business. I will start this afternoon and provide an overview of our business, the market opportunity, our record of growth, what we do, and I'll also highlight what we don't do. John will pick up and talk about our market position, our customers, and the portfolio mix. He will then share some examples of the type of business we write. Chris will talk about our approach to specialist underwriting, risk management, market impacts, and how we have reacted to them. He will also share some details of the portfolio performance from a risk perspective.
We are a specialist real estate lender with net lending balances of GBP 1.244 billion as of the 31st of December 2023. These balances have grown by 18%, GBP 190 million, since 2020, a period that includes the pandemic years and more recently 14 consecutive interest rate increases. At December 2023, our net lending balances were 37.5% of STB Group lending balances. Our target markets are residential housing, both development and term investment, and commercial property, both development and term investment. It's often the case that we commence a relationship by funding the development of an asset, and that then converts to term support in the investment phase. John will show an example of how we do that using our build-to-rent product later on. We have the ability to fund hotels and non-speculative commercial development as avenues for future growth, but our core business is residential.
Of the 30 million housing units in the U.K., approximately 12 million are in private and social rental with a value of GBP 2.5 trillion, and our addressable market is the funding required to support that. These segments are growing with investor sentiment for living segments, residential developments, and logistics strengthening. As widely reported, there is a shortage of owner-occupied housing. There is also a shortage of private rental property. Rent levels have been increasing with high levels of demand. There is also a shortage of affordable, social, and retirement housing. Against this backdrop, there is an expectation that in the next six or seven years, there will be yet more renters and more rental properties will be built. Today, we fund approximately 6,000 housing units. We have a national appetite and can see clear drivers of demand for the funding products that we offer.
Our primary focus is residential, and quite simply, Britain needs more houses. Formed in 2014, we are now in our tenth year of operation, and so we are a mature business where borrowers frequently choose to stay with us, having been through the full cycle of our support. Our people have chosen to be real estate experts, and we have chosen them for that expertise. They are our brand ambassadors representing STB in the real estate market. We have very low levels of people attrition because we place great emphasis on their personal development and because retention of their skills is important to us. We have a reputation as a specialist relationship-led business, providing bespoke and tailored lending solutions to professional investors and proven property developers. We understand our customer's business, and we always seek to grow our business with them.
Our specialist underwriting approach is through the cycle and is based on traditional and tailored credit practices. That means that we only lend against first legal mortgages over U.K. collateral. We meet every borrower and view every asset. We do not provide second charge or unsecured lending, and most importantly, all facilities are structured against the cash flows of the assets funded and against multiple exit assessments. This through-the-cycle approach has proven to be robust in times of heightened credit stress. For development funding, we lend up to 60% of the Gross Development Value, and for term investment, we lend up to 70% of loan-to-value. You will see later that at portfolio level, our leverage is below these maximum appetite levels. Our business has been built by attracting talents with a large bank clearing bank background, with both real estate and relationship banking expertise.
These people are my senior team. They all have this experience and have been with us since the early and formation years. As we have grown, we have created an origination team, a portfolio management team for where customers need more intensive support, and our relationship management team where we manage lending and customer relationships in life. These are some of the core attributes of our business. We are specialists. Our teams are very skilled at debt structuring. They know the real estate finance market and have extensive networks in broker and professional communities. We provide high-touch relationship. Direct, personal, and regular contact is central to our offering. We understand our borrowers' business and seek to support their plans to grow. We are tailored debt providers. Every exposure is assessed and structured against underlying cash flows and repayment scenarios. Interest-only structures are often a feature.
This is all part of the through-the-cycle approach. Our minimum transaction size is GBP 2 million. Our maximum loan size is GBP 45 million, and our maximum term is five years. Our customers are real estate professionals, often requiring complex funding structures. Our typical development customer is a regional house builder, and our typical investment customer is an established private landlord or investment fund family office entity. We have a very clear focus on sustainability. Energy efficiency is assessed in every transaction, and we also have an offering that enables borrowers to improve the energy performance of their portfolio. Perhaps it would be helpful if I also say what we aren't or don't do. We are not a provider of volume-regulated buy-to-let mortgage products. We are not a formula or loan-to-value lender. Our customers are not accidental landlords or small opportunistic house builders.
We don't adopt light touch or indemnity-insured legal due diligence or drive-by valuations. We don't provide bridging loans, development exit, or short-term refurbishment and sale transactions. John will talk about our market position and competition shortly. On the point of our lending term of five years, this is very typical in the SME and corporate markets. We are rarely asked to extend this term. From a risk perspective, the shorter term supports very close risk management, which is appropriate as our lending facilities are not lend-and-forget. I should add that for us to consider lending terms greater than five years would require changes in our funding deposit-raising strategies. This is our growth since 2014. We have grown through the uncertainty of Brexit, changes in risk-weighted asset treatments for development funding, changes in stamp duty, the pandemic years, and indeed during a period of 14 consecutive interest rate increases.
What this also shows is that this growth has not been achieved by increasing costs. In fact, in the last four or so years, the number of staff has been flat or marginally reduced. This business is very efficient and, as a result, is scalable. Chris will show how we have managed risk during this period of growth. As a business, we are clear we won't join the race to the bottom in terms of price, nor will we travel up the risk curve to win new business. Instead, we win business through the tailored structure of support we provide and the dedicated relationship that we offer. In our early years, 100% of business was sourced from brokers. In 2023, that has substantially reduced. A key focus for us has been to increase the amount of repeat business with existing customers.
While we continue to maintain strong relationships with chosen brokers, increasing the amount of business retained at maturity has been a key point of our strategy for growth. In simple terms, origination costs are reduced, better understanding of risk with an already known borrower with a track record, better returns as we are not pitching in competition as we are with broker referrals, which tend to be price-led. I'm going to hand over to John Griffin now. John will talk about our customers, but first, a short video.
At Real Estate Finance, we're in the business of creating homes for everyone. We lend to housing developers so they can build new homes or to professional landlords to buy and invest in properties. Typically, we loan between GBP 2 million and GBP 45 million, which means we are helping clients invest significant amounts in the future of the U.K. housing market.
The relationship between the customer and the RD is the key point at the bank in terms of making sure we deliver what they're looking for within the bank's requirements. When we're looking at a loan and understanding the customer's financial health, we want to make sure that they can afford the transaction we're putting together today and into the future. We look at that in a great deal of detail and make sure that they can make that transaction work into the future. It's all about delivering good performance.
Once the client has been given a thumbs up, we also need to check out the property or build project they want to finance. Expertise in fields ranging from legal and surveying to building valuations all work together to sign off the conditions of the agreement. It's all about teamwork. At Real Estate Finance, our job is funding the homes in a way that is risk-aware so we keep ourselves and our customers safe and secure. Our story doesn't end there. Properties are bought, building is started, and we are still there for our clients, supporting them through the life of a loan and beyond.
Thank you, Geoff, and good afternoon, everyone. My name is John Griffin, and I lead the London Real Estate team. My team are responsible for originating, closing, and then the ongoing management of our real estate loans. This is an illustration of where we sit within the wider lending market. The two axes are self-explanatory, being risk and price. Over the past 10 years, the debt market has changed significantly as clearing banks have adjusted their focus onto mass market retail and the larger corporate deals. The offering for SMEs, which we define as being lending in the GBP 2.5 million-GBP 25 million space, is increasingly more formulaic. Risk appetite is at the lower end, and as a result, the lending margins are also lower. The traditional high street banks today for SMEs are far less relationship-led and, in turn, far less accessible.
The customer experience has much more of a call-center feel. This has led to a gap in the market that Secure Trust Bank, REF, and others have sought to fill for U.K. SMEs. A tailored, direct relationship service for our real estate experts where we can accept sensible levels of risk for the right return. We see our competition today increasingly with mid-tier banks and other specialist real estate lenders. Further up the risk curve, you will find non-bank lenders. These are primarily debt funds, which can come and go depending on the equity raised and are often very aggressive on leverage and price. The key message here is that we operate in an area of the market which has emerged over the past 10 years. It's rich in opportunity and growth potential while not having to climb the risk curve significantly.
It is not a market segment where we see any movement from clearing banks to re-enter in the medium term. It's fair to say there have been dozens of new entrants to the debt market over the past 10 years, but very few have the established team, track record, and mature business that we are showing you today. This shows the geographic distribution of our lending activity. As the slide says, local customer, national reach. Our customers are mostly located very close to us, and that allows us to provide the bespoke, direct relationship service, which has been key to our success. All of our customers have their own named relationship manager for the life of their relationship with Secure Trust. We get to know their business, and as we establish a strong relationship, we follow their investment decisions and are happy to fund on a national basis.
We visit all of our secured assets before lending, and in the case of developments, we'll visit them every 6-8 weeks to monitor progress firsthand. Here we set out a breakdown of our lending book balances by sector: residential and commercial, investment and development, alongside the weighted average loan-to-value and the associated risk-weighted assets that determine the capital required to support the lending. It's worth highlighting that over 80% of our book is in residential investment. This is by far the safest sector in the real estate market and particularly attractive given this also has the lowest RWA consumption. Residential investment is not simply flats and houses. Within this asset class, we include our funding of purpose-built student accommodation.
This is a sub-sector within the real estate market where we have been very successful over the past three years by funding the development and then hold of new-build student accommodation blocks. As you would expect, we underwrite in this sector on a cautious basis by only funding assets which are located to serve universities in the top 50 rankings. This serves as a proxy of demand and also underlying financial strength of the institution. In terms of residential development, we have consciously been selective here over the last three years given wider market challenges. Credit risk is higher, and the impact of COVID, increasing cost of materials, and labor shortages have all had a negative effect. The transactions we do underwrite are monitored more closely, but also provide higher returns accordingly.
Key point here is that as a team, we have the experience and expertise so that moving back into residential development lending as market pressures ease is a further avenue for driving net margin across our business. This is a sector we target for growth over the coming years. Just as important as what is said here is what is not. We have virtually zero exposure to high street retail, city offices, or any form of speculative development. These are higher risk real estate sectors with well-documented challenges. Again, we have virtually zero exposure here. Finally, you will see that we currently have just over 200 loan accounts. We are selective and look to grow our books safely. We do not chase volume, but have grown organically, and as Geoff demonstrated earlier, our customers stay with us, place more business with us, and make introductions for us.
The next few slides are going to hopefully bring to life everything we have discussed so far by showing some examples of recent transactions completed within the real estate finance business. This slide focuses on our core residential investment product. We commenced a relationship with this customer in 2018, initially by supporting a build-to-rent development for flats in Hemel Hempstead. As ever, development poses challenges, and for this customer, we worked through a contractor failure midway through the build and also the initial impact of COVID in 2020. The development was a success and the relationship firmly established. Subsequently, we have grown this relationship to GBP 50 million of lending across three sites through our traditional residential investment product. Loan facilities of 60% loan-to-value against secured properties, in this case, new-build flats in Swindon, Peterborough, and Basingstoke, with a fixed rate of interest payable each quarter.
This is key given our customers' income streams are also essentially fixed, being the rental income from the units within the property. While residential investment is the core product today, this is a customer who has also benefited from our flexible approach. The customer wanted to enhance income and value on their secured assets by adding on additional floors and more units. We supported this customer with further tranches of funding while maintaining their core investment loans. Real Estate Finance is an active sector for our customers, and they need an active specialist lender to support them and their aspirations. I would point to the customer quote for the strongest endorsement of our work here, which summarizes what we aim to be: a trusted partner, understanding property lending, and pragmatic. This slide is an example of our Build-to-Rent product that Geoff referenced earlier.
Our customer here was an investment fund managed by Edmond de Rothschild. We have funded multiple projects for this customer, which are all the construction of new-build private residential blocks in major U.K. towns and cities. These transactions are an example of our flexible and tailored lending approach. We provided a single committed 5-year loan, which was broken down into development and investment phases. The initial term of 24 months allowed the customer to complete the construction of the buildings, with the residual committed term of 36 months taking us to a total term of five years, allowing the asset to let, stabilize, and ultimately put itself in the most attractive place for sale. We charge a higher margin for the first 24 months while construction is ongoing, as risk and risk-weighted assets are higher.
We then step this down once the asset is complete and pre-agreed letting hurdles are met, so risk is then reduced, as has RWA consumption for the bank. Our build-to-rent product has proven very popular with developers of both private residential and purpose-built student accommodation. It's a single loan which supports the full business plan: acquisition, build, stabilize, and exit, and it removes the stress for our customers of having to refinance expensive development debt ahead of achieving sufficient lettings on a completed asset. There are some variations on this in the market, but few and far between. Quite simply, many of our competitors either take a formulaic approach to lending or specialize in only one aspect, which is generally development, and as a consequence, struggle to deliver something like this. Again, I would point to the customer quote here: solutions-driven, responsive, reliable, and consistent.
We know our customers, and we tailor lending solutions to support their business plan. Finally, an example of our commercial development funding. This is a well-known logistics site being developed to support the Port of Felixstowe. We provide funding for our customer to assist with the acquisition of land and then construction of specialist warehousing units off the back of either pre-let agreements or pre-sale agreements to good quality covenants to ensure we have a clear line of sight on repayment. Completed units on this site have been sold to institutional buyers in LondonMetric PLC, KKR Mirastar , and Tritax REIT, among others. We have lent and been successfully repaid a significant amount over the last three years, with the next stage of development firmly underway. The debt here is reasonably short-term, generally a maximum of 24 months.
The risk and RWA usage are higher in construction, hence the lending margins and fees charged are higher also. As you would expect, all of our development lending is on a variable rate basis to ensure any cost of funds changes through the term are captured and passed on. This is a site which is very active and requires close monitoring, support, and regular review. It requires a specialist real estate lending team. Again, the customer's own words in the quote: direct service from a relationship manager who understands our business. Some further comments here direct from our customers. These are far more powerful than hearing it from me. All of these refer to communication with their relationship director. Being relationship-led is at the center of our offering. This feedback supports what we demonstrated earlier.
The quality of our service and real estate expertise are ensuring we see ever-increasing levels of repeat business and referrals to new introductions. We will now show you a short customer testimonial video, after which our Head of Credit, Chris King, will talk you through how we manage the risks of our real estate book.
We hold a number of assets. One of the assets, we were midway through an existing financing arrangement, and I wanted to secure a medium-term facility with a new lender and also look at doing some restructuring of the SPV as well. Really, the introduction came through an existing contact I had who would move to REF, who then got in touch with me. I met up with the contact and his colleague, and we went around the actual property concerned. We realized there was maybe something to do together.
The next stage was Secure Trust putting together some indicative terms which were attractive enough to take it to the next stage. So I would say it was very smooth, yeah. I think with all these things, it's about preparation. Secure Trust were good and smooth in terms of processing it and pushing it along till we got the deal over the line. Since we did the refinancing, we've been able to see some good increase in our rental income, and also we've moved it to the next stage now, looking to get planning to extend the building as well. And I think what we've done is built up and expanded a good relationship with Secure Trust, which ultimately is customer-focused.
Thank you, John. Good afternoon. My name is Chris King. I head up the credit risk team and report into the Group Chief Risk Officer.
My team of six is responsible for underwriting and managing credit risk across all transactions. This includes management of credit policies, overall monitoring of portfolio performance, and responsibility for our restructuring and recoveries function. As mentioned earlier, we are not a template or formulaic lender. We rely on the strength of our specialist team and traditional underwriting approach. Each transaction is assessed on its merits and structure, which is driven by quality as opposed to meeting any loan-to-value set out in policy. The underwriting process itself is very thorough, with all property assets visited and meetings undertaken with customers prior to any credit submission. We undertake a full assessment of each customer to ensure that we have a good overall understanding of liquidity, management structure, and experience before we look at the underlying property itself. All transactions are supported by full Red Book valuation.
We consider both macro and micro factors relating to the location, including supply and demand and the effect of climate. We also look to support assets which have low risk of flooding and have a strong preference for properties that produce low carbon emissions. In life, we work closely with customers post loan drawdown with good controls to help monitor risk during the life of the loan. All developments are monitored in detail by both our relationship management teams and our appointed professional surveyors. For investment transactions, rental data is assessed quarterly against covenants to ensure any concerns regarding debt serviceability are raised early on. This process allows us to identify any issues or trends at an early stage, and then we can be on the front foot with our customers to work towards resolving any problems.
You can see a number of challenges that have been highlighted in this slide, which have impacted us and the real estate market as a whole. Firstly, RWA changes in 2016 led us to being more selective in providing residential development facilities due to a higher cost of capital. This was a key reason for our strategic shift to residential investment, which I will cover in the next slide. Personal tax changes saw the departure of smaller landlords from the market in recent years. As a result, we have seen a gradual shift in our customer base to larger SME corporate-style borrowers and funds. These larger borrowers require a different level of understanding in terms of our underwriting. Zero carbon standards and climate change. These have also been a focus in recent years.
We consider the impact of climate in all transactions, and we prefer to lend against low carbon emitting properties. This has also formed part of our strategy to grow. In 2021, we launched our Green Loan product, providing funding against low carbon properties as well as providing facilities to help our customers improve EPC ratings. This helped to demonstrate the real estate team's climate credentials as well as assisting in improving the quality of the property security across the loan book. COVID-19, obviously, this had a significant impact on the real estate book, both in terms of new business and impact on our existing customers. Being largely focused on residential-led transactions and with no exposure to the office sector, that really served us well as companies adopted hybrid working. Our modest exposure to development finance also meant that we were insulated from the significant cost inflation within that sector.
In contrast, sectors of growth during the period included logistics, where we were able to support the right opportunities during this difficult period, as highlighted in the Port One transaction. During COVID, we spoke to all our customers regularly during the pandemic. Each was impacted very differently, and so we worked with all to agree a best way forward on a deal-by-deal basis. We provided forbearance to 58 of our customers during this period, equating to GBP 265 million of facilities, all of which have been worked through. Most recently, we saw interest rates hit a 15-year high. With a very stable interest rate environment for a number of years, this impacted the whole market and particularly borrowers on a variable rate. Again, we sought to be proactive and spoke to all customers affected and those with deals coming to an expiry.
During this period, we were able to support borrowers through offering fixed rates or providing an extension of time to sell or reduce the loan facilities. This worked very well with customers now showing good signs of resilience and interest cover approving across the portfolio as a whole, where borrowers are passing on increased costs to renters. The loan book, as it stands, is 72% on fixed rate, equating to GBP 916 million of facilities. We've remained active across the whole real estate sector since our inception 10 years ago. You can see in this chart that we've remained focused on where we see robust and stable markets. This is largely in the residential sector, which accounts for the majority of our loan book today, seeing that increase from 25%- 84%.
We consider residential investment lending lower risk, which also carries a lower level of risk-weighted assets compared to development finance. Our market is largely in the southeast, where rental growth has remained really strong, delivering good levels of debt serviceability, which has helped to support stable valuations across the portfolio. We have strategically avoided office and retail sectors, which are more vulnerable to yield shift and have been significantly impacted by the post-COVID environment. Through our specialism and deep knowledge of the residential market, we have a proven track record of growing the book during challenging times. However, as highlighted earlier, we have a very experienced business and underwriting team, where we are able to explore other sectors if the opportunity is quality and fits our appetite. Of course, not everything always goes to plan. This slide shows an example workout case study.
This transaction related to a long-standing customer relationship with a very strong borrower. Unfortunately, they went into administration due to a number of macro factors. We work closely with professional advisors and administrators and were very proactive in the sales process. Our deep knowledge of this site, its complexities and value allowed us to drive up offers for the property we were secured on to a level that saw us comfortably repaid, which was an excellent result. Finally, I think this is a really good summary slide, which highlights the success of our specialist approach to lending and risk management. You can see here that we haven't achieved growth through going up the risk curve and have continued to support our core markets and be led by transaction quality. Our loan-to-value remains well below our credit policy limit of 70%.
Additionally, our cost of risk remains stable and low, contributing toward a lower cost of risk across the group. In summary, we have shown our track record of growth as a tailored specialist property funder. We have a low-cost and scalable operating model with significant opportunities for future growth. Thank you for listening this afternoon. I'm now going to hand back to David.
Well, many thanks to each of Geoff, John, and Chris for an excellent and insightful presentation. As you have just heard from real estate finance and heard for retail finance in November, we have the capability and opportunity to continue growing. We have a clear focus on attractive specialist lending markets, and our diversification and resilient business model is a key strength. The operating model in real estate finance is efficient and scalable and complementary to our ambition to deliver operational efficiency across the group.
The team has a strong track record and reputation in specialist property lending. You will now have a better understanding of their specialism, not just in underwriting transactions, but for managing risk when a customer needs additional support. Our specialist real estate finance business is well placed to continue contributing to the group's success, and as is the case for each of our businesses, we have significant opportunities to continue growing. We have sufficient capital to support our growth plans, and we remain on a positive trajectory towards that GBP 4 billion net lending level, and that will support an attractive return on capital. We are confident in delivering on that commitment. Now, let's open up for your questions.
Thank you, David. We'll now turn to the Q&A.
As a reminder to everybody on the webcast, please can you use the Q&A function at the bottom of the screen to submit your questions. We'll try and cover as many of the questions as possible within the scheduled time that we have available, and anything that we can't cover live on the webcast today, we'll follow up through investor relations. So now turning to the first question, this comes from James. James, he says, "I've had a look at one of your competitors, Close Brothers, with a large but still comparable loan book of around GBP 1.7 billion. They focus much more on development loans, and despite a higher cost of risk, they still manage to achieve a risk-adjusted margin above 6%." So the question is, do you not think you could raise your risk-adjusted margins if you increased your weighting towards development loans? I think, John, one for you.
Yeah, thank you. It's a very good question. I think we referenced in the presentation that the decision to be where we're now, 84% residential investment-led, was a conscious decision from us over the last 3 years-4 years, and it really was a reaction to the stresses in the market, COVID, and then the Brexit-related challenges of labor shortages and materials cost. So we naturally moved towards a safer sector of residential investment lending, but those pressures are easing. Whomever forms our next government tomorrow, all parties have indicated the desire to open up the planning system to help our developer clients bring much-needed homes to the U.K., and that is one of our strategic moves over the next 2 years-3 years to move back into residential development lending where appropriate.
But absolutely the right question, and it's something that we will be doing over the next two years now that we can see those market pressures in the rearview mirror.
Great. Thanks, John. The next question comes from Saeed. He's at Rothschild. The question is around what does Secure Trust Bank do in terms of ESG factors, and how does the bank integrate ESG considerations into the overall business strategy? I think, Chris, one for you.
Okay, thank you. So I'd say ESG is really important to Secure Trust Bank. Within the real estate team, all assets are viewed and assessed by professional valuers who will comment upon flood risk, EPC, and CO2 emissions. Additionally, we will apply external data to understand the impact of climate on those properties in the short and medium term.
On all loan facilities, we look to support borrowers who meet minimum EPC standards and provide additional funding where required to help improve those EPC ratings.
Great. Thanks, Chris. The next set of questions come in from Gary from Shore Capital. He's got three questions. I'll take them one at a time. The first question is, you talk about being a specialist relationship-led business, but what is your USP or your real point of difference? I think, Geoff, maybe take that one.
Well, thank you. I think it's manifold, but I'd have to say, start by saying it has to be the skill and expertise of our people. I think we'd also say that we've proven to be agile in the market and reacted to many challenges.
But if I were to say, we talked about our build-to-rent product, which is an excellent example where we use the expertise that we have for the benefit of our customers. So I think that would be the best illustration. And look, we really are a relationship-led business, and we've talked, haven't we, about how we've had increasing levels of retained business, and I think that's the best example of what our USP is. People stay with us because of the relationship support that we give them.
Okay, great. Thank you. The second question is, what does the demand environment currently look like, and how would you describe your current risk appetite? Maybe David, you start, and one of the team can build up.
Yeah, I think the, thanks for the question, Gary.
The question on our view on risk appetite, I mean, I think it's clear to see that we have been very mindful of some of the pressures on customers over the last 2 years-3 years. As John has referenced in their response to the earlier question, we are starting to see that ease somewhat, and certainly we are optimistic about the second half of the year seeing that continue. Clearly, any movement on interest rates downwards will support and probably give fuel to that trajectory. So I think from an environment, hopefully things are improving. We also are very conscious that we have very clear risk appetite mandates.
We have not been looking to make dramatic changes to those, so we will remain a cautious lender, but where we see opportunity, and John has given a response of where one might exist, we will, where it is safe to do so, and we see the opportunity for delivering returns that are appropriate for the risk we take, we will move into that type of new extension of the property portfolio. So I think no change in risk appetite, remain relatively cautious, but where there are opportunities for good risk-adjusted margins and returns, we will take them.
Great. Thanks, David. And then the third question here from Gary is, you talked in the presentation about being strong in London and the Southeast. What's particularly attractive about this region, and how do you replicate your success outside of the London Southeast region? John?
Thank you. Very, really good question.
I mean, London is our capital city. It's the economic powerhouse of our country. It's proven itself to be resilient for decades in terms of underlying demand from renters, from owner-occupiers, from professional investors, both in the U.K. and around the world, really, where they want to place their weight of money. And I think that's what you'd expect us to say, that we focus on London and the southeast. Outside of that, the U.K. as a whole is underserved in terms of housing supply. And as long as you get the dynamics right in the beginning in terms of our credit underwriting, our stress testing, you can make an attractive return by lending into any part of the U.K. housing market. And I think we've illustrated that with the right customers, we will follow them as they invest across different parts of the U.K.
We've got exposure in the north, in Scotland, in the Midlands. And yeah, these are again avenues where we can move into in the future, but the U.K. is fundamentally underserved.
Great. Thanks. The next set of questions are building on the three-part questions come from Jens for Investec . Again, I'll do them one at a time. The first question is, can you give us a sense of the size of the market that you operate in and therefore how you're thinking about the medium-long-term opportunity? Geoff, one for you.
Yeah, thank you. Well, we see the market that we operate in to be quite substantial. I think in the presentation we quoted that the value of property in private rental and social housing is GBP 2.5 trillion. Now, clearly, that's not all funded. Many of it will be held without debt.
It's difficult to identify the total amount of funding opportunity. But what we do know from the sources at the Bank of England, they say that in the corporate segment alone, real estate lending is GBP 162 billion. Now, we currently only fund GBP 1 billion and a bit. So in that context, we see quite a substantial opportunity for us. We also have a national outlook, and so whilst we can see that London has performed well, we do see opportunities as we look around the U.K. So a substantial market and plenty of room for us to grow.
Great. Thanks. The second question is that however good your underwriting, sometimes clients become stressed. How do you manage this process? Chris, maybe for you.
Thank you.
So I mentioned in the presentation around the controls and monitoring that we have in place so that we can capture those issues very, very early on because that means we have more options available to us. As soon as something happens, it gets escalated to senior management who will be involved in the ongoing monitoring and management of these stressed files, and that process works towards agreeing a strategy with our borrowers to rectify the position. We have a really strong preference to work with our customers on a consensual basis because we believe that working together, we can achieve much better value outcome and help our customers preserve their equity within any properties.
Okay, great. Thank you. And then the third question from Jens was, in the presentation, you guys talked about build-to-rent being a point of difference.
What is it particularly about Build-to-Rent as a concept or as a strategy is attractive to you and also for your clients? Geoff, do you maybe want to start on that one?
Yeah, I think the first thing I'd say is with the Build-to-Rent, what it enables us to do is to build, underwrite some business that will be on our books for five years. So if we were focused just on development, we would just be doing that transaction, and then we'd see it refinanced away. If we were just doing investment, we'd only do the tail of that. Whereas by doing the Build-to-Rent, we can actually improve our net interest margin by funding in the development phase, but then lock it in with us for an investment phase. So for that reason, we see it as kind of a strength of our strategy.
We also see it builds relationships because if you fund a borrower through those two phases, then they see you as their funder of choice, which is kind of one of our primary goals.
Great. Thank you. The next question comes from Alex from Berenberg. At the start of the presentation, you talked about a small shift to consumer lending in the lending mix. At the GBP 4 billion net lending target, what proportion of the loan book do you expect to be from real estate finance? I think, David, that's one for you.
Yeah, thanks, Alex, for the question. The comment really is a reflection of what's actually been happening over the last two or three years. So as you know, all four specialist lending businesses have been growing, and they still have plenty of opportunity to grow further.
But we have been seeing some faster levels of growth in both vehicle finance and in retail finance. The indication that we have given is that we would always expect a fairly tight band. Sort of 55%-45% is probably the outer limit. In terms of you thinking about your own modeling, somewhere in that, it was 51% at the end of 2023. A 1% or 2% move over the next year, 18 months is what we are thinking about and planning for. It doesn't need much of a shift to make a difference on NIM.
Great. Thanks, David. The next question comes from James. James says, for your hybrid build-to-rent loans, where do they sit within your risk-weighting table? Do they start in residential development and then transition to residential investment? I think, John, one for you.
Yep. Thank you, James. Yeah, you're spot on with your analysis. When we underwrite and we go on risk, the capital committed is in the construction element, and then there's built-in triggers that the customer must hit linked to value, linked to lettings, linked to income, whereby we can then apply that lower cost of funds and lower cost of capital. Then when we apply the lower cost of capital, the customer also sees a price benefit. Your analysis is spot on into how they're structured.
Great. The next one comes from Nick from Canaccord, a broader real estate market question, I think. To what extent do you think stress in office and retail assets held by institutions will filter through into the commercial residential development and student markets in which you're exposed to or lend to?
That's an interesting question.
I mean, we have no exposure to high street retail or any form of significant commercial lending for the reasons that commercial have been impacted by work from home and high street retail by the rise of internet shopping. We focused on residential investment. I think we referenced student accommodation in that question. That's an asset class that investors are moving towards because they see it as providing a more stable income stream to replace the long-let blue chip covenants you would have had in offices and retail. So I think that's where you're going to see institutional capital move towards. Build-to-Rent is another part of that. And the good thing about PBSA and Build-to-Rent is they're slightly linked.
If you find that your accommodation is struggling as student accommodation for a specific area, maybe through competition, maybe through a lack of demand for that university, it's not too difficult to reposition that as build-to-rent. It's a similar style of accommodation. So the capital's got more protections, in my view, when they invest in residential. And I think you will see a weight of money moving towards residential as institutions come away from commercial offices and retail.
Great. Thank you. The next question comes from Mark at Hardman & Co. During the presentation, you highlighted credit assessment is cash flow, not LTV-driven. Could you comment on your interest coverage today, how it compares to the past, and how you see it evolving over the next couple of years? Chris, yeah.
Yeah, good question. So we analyze the cash flows on all properties that we lend against.
We'll make sure we really understand any costs associated with that. We certainly went through those on a line-by-line basis during recent cost of living increases and interest rate rises. So we get very comfortable on day one, and then we will further stress the cash flows of that asset so we can understand what happens if costs go up further or if interest rates go up further. So we know that when that loan expires, it can service debt at a much higher level of interest rate. We have covenants that we monitor on a quarterly or monthly basis. So again, we can capture any downturn in terms of underperformance on specific assets. But what I can say is we've worked through the 14 interest rate increases, and our portfolio is actually trending up in terms of interest cover following those recent increases.
Great. Thanks.
And actually, I've got a second question here from Mark. Could you comment on the ownership of your loans and whether you sell on loans? So in the mainstream banks, lenders will often have moved on before a problem happens with a special recovery unit so they don't actually own the loan when it goes bad. What's the policy and process at Secure Trust, David?
Yeah, well, actually, in real estate finance and across the piece, all of the lending sits on our own balance sheet, whether the customer is up to date or is requiring further support. So we have not, at this stage, sold on any of the loans that are requiring that additional support. And the reality is we're a relatively small business.
As you've heard today, the experts who have presented to you work very closely, and their colleagues work very closely with the clients to support them through any particular periods of stress. We're not large enough that we're transferring, even internally, problem cases as other lenders may do into some specialist unit that's just trying to maximize return in the short term. So I think you see a very different model from the Real Estate Finance team that we have. Great. And then the final question I have here is from sorry, I think we just had another one come in. The next question come in is from Andrew. And this is, you've had a great track record of success that you presented at the start in terms of loan book growth and fairly tight on your cost control.
Is there any particular reason to see that changing over the next few years? Geoff?
Thank you, Andrew. I think you said thank you. No, no reason to change that outlook. In fact, we would expect very similar levels of growth to what we've achieved. There may be a need to selectively invest in people as we grow. That decision will be taken in the context of the group's approach on Fusion, but also in good knowledge of our track record of growth and managing our people. So no need to change the outlook at all. Thank you.
Great. And I think this is the final question that comes in from Gary at Shore Cap. In terms of return on equity, clearly, the group currently doesn't disclose divisional level return on equity. But how does the real estate finance business compare to the other three lending businesses?
I can take that. In fact, Gary, I'd have been disappointed if you hadn't asked that question because I know not only yourself, but some others are keen to get some further insight on our segmental reporting. We've listened to the sort of questions and the feedback on that. Our intention is to look at how do we provide more color as part of our 2024 year-end results presentation. I think if I ever were to start giving you some indication and start ranking across the business units, it just leads to further questions. We'll pause on answering it today and make sure that we give you some further color and clarity when we get to the results at the end of the year. Thank you, David. Well, thank you, everybody, for submitting the questions.
That's the end of the question session.
So I'll now hand back to David for closing remarks.
Okay. Thank you, Phil. And thank you for all of those questions. They go across quite a good range of topics within the Real Estate Finance business. As you've heard, the team that you've heard from today and their colleagues have got a strong track record in specialist property lending and have a cost-effective platform to deliver further profitable lending growth. You'll now have a better understanding of their market, what they do, but also about the team's specialism. At the group level, including the contribution from Real Estate Finance, we continue to grow. We have sufficient capital to fund our growth and to move closer towards that GBP 4 billion net lending ambition. Our intention is to continue in that trajectory.
Referring back to the first slide I showed around how do we unlock that level of mid-teens return, it is a case of continuing to deliver on our growth commitments, holding the cost base flat and taking opportunities to drive cost efficiencies further, about a slight mix change moving towards the consumer side and looking favorably on the outlook than we would have been 12 months ago, maintaining our stable cost of risk. So that is really the key to unlocking the mid-teens returns. Thank you for joining us today. Our intention is to obviously update you on the further progress that all of our teams have made in the first half of the year when we update the market on our interim results in August. So I look forward to seeing you then. And in the meantime, just thank you again for joining and for those questions.
I hope you found this afternoon's session of use to you. Thank you.