Laxfield study shows jump in debt requests, especially for acquisitions, writes Alex Catalano
The UK’s real estate debt market has moved into expansion mode. Financing requests are up to a seven-year high, with acquisition-related borrowing pulling ahead of refinancing and diversification into mixed portfolios, industrial, hotels and student housing, according to Laxfield Capital’s Q2-Q3 UK debt barometer.
“In the past six months the big signs of dysfunction have almost gone at the core end of the market,” says Emma Huepfl, Laxfield’s head of capital management. The barometer logs a pool of 496 loan requests totalling £46bn.
There was a significant boost to the financing being sought: an additional £13.5bn over the past two quarters, 27% more than the previous six months, with Q3 particularly strong. This includes a sizeable uptick for large loans, as global equity targets big UK assets.
Lenders also are keen on larger deals, with banks and non-bank lenders alike competing to finance real estate. London-related requests still outnumber regional ones by volume of debt, but by number, there are slightly more regional requests.
Acquisition-related finance has staged a “remarkable recovery”, says Huepfl, and accounts for 53% of the debt requested in the past two quarters.
After the recession, most deals were completed with equity and debt was brought in subsequently, but this has changed. “Even if a deal is closed in cash, most borrowers get the debt provider involved at an early stage,” Huepfl adds.
Interestingly, many of the current refinancings are looking for a second bite of the cherry by returning to the market in search of debt at much more attractive rates than their first, post-crisis refinancing.
Perhaps the most striking aspect of the financing requests put in over the past two quarters is a fall in loan-to-value ratios. The weighted average LTV ratio required fell to 55% (see fig 1 above). Average LTV levels were suppressed by more than £2bn of requests from big institutions and corporations looking to refinance at low LTV levels.
Caution on LTV levels
“Even among those seeking more than 70% LTVs, the average request is below 75%,” notes Huepfl. “Things have not gone mad
at that end. But we are in a very high-value market. People are cautious about getting through a cycle with their financing and the need to underwrite valuation fluctuations.”
In today’s hot markets, 60% of value may represent 100% of 2010 values in some cases and investors are still sensitive to the dangers of over-leveraging.
Most of the debt requested is short term, with 85% in the past two quarters being in the three- to seven-year range. Although non-bank lenders want to deploy significant amounts of capital over a longer term, demand for this type of loan is limited.
“When you look at 10- or 15-year rates, it is slightly surprising that borrowers don’t want to have some of that very low-cost finance locked away for the longer term,” says Huepfl. “But the market is still very focused on buying assets, doing something, and getting out and selling them.”
With equity-rich institutions snapping up core offices and retail, leveraged investors and lenders are having to broaden out into alternative sectors. Laxfield’s barometer revealed a jump in demand for finance on mixed portfolios, industrial, hotels, student housing and other operational assets, which together accounted for 48% of deal requests.
“It reflects more confidence that lending is available much more broadly now. It’s allowing activity to take place in those markets,” says Huepfl.