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Capita: Diverse lender pool will finance ‘almost everything’ in UK real estate

The divergence in pricing between lender categories means that borrowers face more of a relative value consideration when sourcing property debt.

A diverse mix of lenders is willing to finance a broad range of property across the UK, although the leverage and pricing they are prepared to offer varies significantly, according to new research from Capita Real Estate Finance.

The divergence in pricing between lender categories means that borrowers face more of a relative value consideration when sourcing property debt, the firm’s inaugural Market Trend Analysis report showed. However, “almost everything” is financeable, the report showed, despite “black spots” of availability.

In total, Capita surveyed 81 lenders across 12 distinct categories on their lending appetite, intentions and projections. The results showed that more than 70 percent of lenders are aiming to increase loan volumes in the next year, with around half of respondents expecting to expand their lending teams.

In the senior debt market, German banks, followed by insurance companies, indicated that they offer the lowest loan pricing at average levels of around 200 basis points. At the other end of the spectrum, hedge funds are the market’s most expensive lenders, offering senior debt with average margins in the region of 700 bps.

Lenders across several categories expressed the willingness to provide mezzanine debt, with those borrowers able to source mezzanine finance from banks likely to achieve the lowest-priced debt. Asian banks, for instance, indicated pricing at an average 650 bps. Debt funds indicated pricing at an average 1,063 bps, alternative lenders including family offices at 1,170 bps and peer-to-peer lenders were most expensive at 1,500 bps.

In the whole loan market, insurance companies and European banks, excluding German banks, reported the most competitive margins – at 275 bps and 325 bps respectively. Debt funds were above the 600 bps mark, while hedge funds, at 833 bps, and peer-to-peer lenders at 900 bps are the most expensive.

Source: Capita Real Estate Finance

The survey also showed that, across the UK market, the maximum leverage for both investment and development loans is available through hedge funds with maximum loan-to-value ratios on investment loans exceeding 90 percent and, for development loans, loan-to-cost ratios just shy of 90 percent.

Insurance companies were surprisingly competitive on leverage, with 70 percent maximum LTV on average, matching or exceeding all banking lender categories.

The survey assessed the various lender types by the “relative value” of their lending, based on maximum LTV on offer, against loan pricing. Among those deemed to offer “good” value were hedge funds and insurance companies. However, the research showed that the majority of lender types compete within the 200 bps to 300 bps range at broadly similar LTVs.

Source: Capita Real Estate Finance

On sector and geography, the report showed that almost all property is financeable, given lenders’ stated intentions, with offices, then retail, as the most popular asset types with lenders. However, there is less availability when two or more negative deal aspects combine, for instance, an undesirable sector plus weak location, the report noted. Hotels are the most challenging assets to finance.

On development finance, all UK banks surveyed, as well as all North American banks and all peer-to-peer lenders claimed to be willing to fund residential development for sale. In the commercial development market, lender types had varying appetites for fully pre-let schemes, with all hedge fund respondents prepared to provide finance, although only 77 percent of UK banks and 73 percent of debt funds were able to fund schemes.