

The total volume of UK real estate finance requests recorded by debt advisor Laxfield Capital during the second and third quarters of 2016 was almost 25 percent below average, which Laxfield co-founder Emma Huepfl said reflects “irregular market conditions”.
The latest Debt Barometer report compiled by the London-based advisor showed that borrower demand fell by 27.2 percent from the previous six months and was 24.8 percent below the three-year average of £11.4 billion per six-month period.


“Large ticket acquisition finance requests fell as international investors held back from the market, and sponsors delayed refinancing decisions citing concerns over volatile debt pricing and supply,” commented Huepfl.
“Nevertheless, some investors achieved extremely competitive financing terms as interest rates plummeted after the referendum. Loan count rose substantially in Q3 as opportunistic investors traded actively in the mid-market, which was also reflected in high demand for regional and portfolio funding,” Huepfl continued.
Investors requested just £3.6 billion of finance secured by London assets during the six-month period, down from £7.1 billion in the preceding six months, as international buyers stayed away before and after the UK’s EU referendum.
However, increased activity in the trading of mid-market assets in opportunistic Q3 deals meant that the actual number of loans requested, at 169, was marginally higher than in the previous period.
The volume of regional finance requests actually only increased slightly from £4.7 billion to £4.97 billion between the two periods, although the latter represented 58 percent of requests, the highest regional proportion recorded by the firm.
The average loan size dropped markedly to £50.83 million, compared to the long-term average of £85.3 million. The volume of requests for finance over £100 million was down from £8.6 billion to £5 billion, while the number of sub-£50 million loan applications increased from 103 to 134, triggered by opportunistic investments from UK funds rebuilding liquidity.
“A large jump in requests in the £20 million to £50 million deal bracket helped to build loan count to highest recorded levels, even though volumes overall were down,” Laxfield said.
Borrowers sought more finance for acquisitions rather than refinancing, the report showed. Combined debt and equity refinancing requests fell from £6.84 billion to £3.93 billion across the two periods.
“Borrowers may have been deterred from refinancing by questions over lending appetite and the perception that spreads were widening,” Laxfield said. “In retrospect, a huge fall in five and ten year rates largely offset margin increases during Q2 and Q3, and some borrowers locked into extremely low cost long term funding in this period.”
Expected pricing increased by an average of 24 basis points across the pipeline of deals in Q2 and Q3, in line with the trajectory of pricing seen during the last year. However, the firm noted that expected pricing does not necessarily reflect where deals closed.
The average loan-to-value (LTV) requirement during the period was 58.9 percent, with the majority of requests recorded within the 55 percent to 65 percent LTV range. Valuations were heavily caveated during Q3, however, and some lenders wrote down headline values on a precautionary basis during loan assessment, meaning that LTVs may have consequently been recorded higher.
Requests for funding above 70 percent LTV were well down from the previous six months, from £2.4 billion to £900 million. Average loan term requirements were six years, although it was a strong period for requests of more than seven years, which formed 25 percent of the total pipeline.
“We increasingly see borrowers seeking to compare fixed and floating rate market terms before deciding whether to accept yield maintenance or seek more flexibility from a bank style (floating rate) lender,” Laxfield said.
Laxfield’s Debt Barometer report, now in its seventh edition, provides an early indication of changing trends in the UK real estate debt market by recording finance requirements at the stage when borrowers approach debt providers seeking terms.
The firm established a smaller-ticket lending line in 2015 and monitors the sub-£5 million market separately to its main sample. It recorded 65 new loan requests, comprising £173 million in volume. Demand was down from £223 million across 84 loan requests in the preceding six months.
In terms of development finance, 23 new loans were requested, representing £1.48 billion in volume. There was a decrease in leverage request, as average loan-to-cost ratios across the pool recorded by Laxfield fell from 62 percent to 58 percent. Expected pricing increased by 62 basis points during the period.
“A very different environment for development financing has emerged in the past twelve months, with lenders scaling back or withdrawing from the market as longer term uncertainty around the economy and strength of the occupational market has emerged,” said Laxfield.
In total, Laxfield’s report references requests for funding received since January 2013, drawing on a total sample of 1,422 loan requests totalling more than £98.3 billion.