Requests for large real estate acquisition loans in the UK market halved during the first quarter of 2016, possibly reflecting the market pause ahead of the referendum on the UK’s membership of the EU, according to debt adviser Laxfield Capital.
Acquisition finance of more than £50 million accounted for 51.8 percent of borrower requests by volume during Q4 2015, but dropped to 25.9 percent in Q1 2016, according to Laxfield’s latest UK Debt Barometer, which covers the two quarters.
Below £50 million, acquisition finance requests maintained levels seen in previous reports at 56.4 percent and 54.1 percent of the total for Q4 and Q1 respectively. The firm said that the split was consistent with the market for larger deals being heavily influenced by international investors, which were perhaps holding off UK activity until after the 23 June referendum.
In total, the volume of requests for real estate finance during the six month period stood at £12.02 billion over 167 requests.
Refinancing demand compensated for the lack of demand for acquisition finance to a degree. During Q1, debt refinancing accounted for 44 percent of requests by volume, up from 35 percent in Q4. Equity refinancing accounted for 30.1 percent, up from 13.2 percent.
“Acquisition activity was very notably slower for loan requests above £50 million in Q1 2016 as the uncertain political environment exercised the minds of larger property investors. Muted trading activity was balanced by investors bringing forward refinancing in a low underlying gilt and swap rate environment, which helped maintain overall volumes,” said Emma Huepfl (pictured), co-principal of Laxfield.
“Whilst Brexit troubled decision makers at the larger end of the market, it was largely ignored by smaller investors, and the growth in loan requests below £20 million continued. Finance demand for alternative assets was up again, with hotels accounting for 22 percent of finance requests, balancing the fall in demand in some core sectors,” Huepfl added.
Expected pricing increased by an average of 22 basis points across the pipeline of deals during the two quarters, with upward pressure most acute for shorter loans. For loans of between three to five years, the average margin was at 2.62 percent, up 40 bps from the previous research. Loans from six to seven years stood at 2.46 percent, up 29 bps, while loans of more than seven years were at 1.89 percent, up 18 bps.
“Anecdotally, bank lenders have reported that they are suffering higher liquidity costs, some accepting lower profit margins in the past six months in order to deploy capital in a less active market. If this situation continues, and market trading increases post-referendum, then bank lenders may hold out for higher pricing later in the year,” Laxfield said in its report.
Borrowers were generally restrained on the amount of leverage they demanded. Loan requests above 65 percent loan-to-value (LTV) fell substantially from 45 percent to 33 percent of the pipeline in the last quarter. Laxfield said this reflected the lower level of activity from trader-investors and increased refinancing activity by longer-term holders of assets which tend to use lower gearing.
Leverage requests averaged 56.4 percent LTV in Q4 and 54.4 percent in Q1 2016. By contrast, the average recorded in the period since 2012 stands at 58.8 percent.
A large uptick was noted in borrowers requesting longer-term finance. As a percentage of the total volume, funding requests in excess of seven years have been relatively low since 2012, running at between 4 and 12 percent of total requirements. In the past six months, however, there was a marked change, with demand up to 28.3 percent of requests seen. The ten-year gilt traded below 1.5 percent for much of the period, giving expected all-in pricing for some core ten-year deals of circa 3 percent.
By geography, London’s dominance increased during the six-month period despite the reduced acquisition activity in Q1. Strong demand for refinancing London assets off-set the limited investment finance demand. By volume, 58.3 percent of finance requests were for assets based within Greater London.
By sector, Laxfield noted more demand during the period for finance secured on alternative assets. During the period, hotels accounted for 22.1 percent of requests, up from 8.1 percent in the previous period. Offices stood at 25.7 percent, down from 34 percent over the same timeframe. The firm said that the anomaly may be referendum-related, since prime offices are the traditional territory for international investors.
In the development finance space, Laxfield saw almost £2 billion of requests during the six month period. The firm noted a very strong London balance, accounting for 88.3 percent by volume and 61.1 percent by loan count, reversing what it saw as the opening up of development finance in the regions during the preceding six months. Residential accounted for the largest number of individual development loan requests, but much lower in volume, with the biggest category defined as ‘mixed-use’.
Overall, Laxfield analysed a data pool of £89.1 billion across 1,293 deals, including small loans of less than £5 million. Through its small-ticket Laxfield National programme, which it launched in January, the firm reported that it analysed 84 sub-£5 million transactions with a total value of £222.8 million during the six month period. The sub-£5 million part of the market is analysed separately from the main research.
In the small loans part of the market, leverage demand remained controlled at an average of 57.7 percent in Q4, rising slightly to 60.2 percent in Q1. Expected pricing remained considerably higher than for larger loans, with an average premium of 140 bps over loans in excess of £5 million. By loan term, almost all activity in this sector remained in the three-to-five year range.