Debt-backed investment outside London and other large, core UK markets is rising, a survey by Laxfield Capital has found. The Laxfield UK CRE Debt Barometer report analysed £25bn of senior financing across 268 deals sought by UK commercial real estate investors this year. Around 75% of the 108 smaller, sub-£50m loans requested were to finance acquisitions.
“The market has changed in every area we’ve examined,” says Emma Huepfl, head of capital management at Laxfield. “We’ve seen more liquidity and real diversification into smaller deals, regional deals and alternative assets.”
The UK investment market warmed up over the year, with requests for loans to fund acquisitions rising significantly over the year (see fig 1). This points to competition from a broad range of lenders and a market less dominated by big legacy loans, Laxfield says. But refinancing still dominated, making up two-thirds of the £25bn of total debt requested in the year. Most of this was to replace existing loans.
Regional assets and nationwide portfolios accounted for almost half of the requested loans, but regional assets’ total share of debt fell over 2013, as deal sizes shrank. The average loan size for London was fairly constant at £95.4m, but for regional/national portfolios fell from £157m to £61m (see fig 2).
“We saw a really strong rise in requests for smaller loans,” says Huepfl (see fig 3). “The focus is not so strongly on the core, safe-haven assets as it was and it is trickling out of London into the regions, in smaller deals.”
The office sector dominated borrowing requirements, but financing requests for alternative assets rose. “Grouping together alternatives such as hotels, student housing and residential, it went from 20% to 30% of our total Q3 pipeline,” says Huepfl (see fig 4).
Borrowers are sticking to conservative loan-to-value levels, at a weighted average of 51.8%. But as the market became busier over the year, LTV levels rose, to 58.1% in Q3. “When senior debt trades routinely at 60- 65%, it is still a very comfortable position and a much more optimistic picture of activity, alongside a reasonably conservative approach at this stage,” says Huepfl.
Loan terms ranged from two to 20 years, the average weighted term being 5.8 years. There is a growing trend for longer-dated finance (see fig 5). Fixed-rate financing – typically associated with longer loans – grew from 5% of all deals in Q1 to 20% in Q3, as some borrowers looked to lock down rates.
“Only 8% of our pipeline by volume was over seven years, which is where fixed-rate typically kicks in. So it is still a relatively small part of the market,” says Huepfl. Laxfield plans to issue the debt barometer twice a year. “What makes this survey unique is that we’re looking at the demand for debt from the earliest point, when inves-tors approach the finance market. We think that makes it a very interesting predictor of future lending activity,” says Huepfl.
Laxfield Capital originates and manages loans for a number of lenders including Münchener Hypo, GIC and MetLife. Since starting up in 1995 the company has advised eight international investors on building or expanding UK commercial mortgage businesses.