Lenders cut margins as acquisition debt leads Q1 and Q2 demand rise, writes Andy Thomson
After a pause around the May UK general election, finance requests have come back strongly, the latest Laxfield Capital UK CRE Debt Barometer shows.
The barometer’s fifth, semi-annual version recorded more than £11bn of total finance requests received by Laxfield in Q2 and Q3, across 154 deals. Momentum has grown stronger as the year has progressed, with Q3 being the second-most-active since the Barometer was launched in 2013.
Notably, 60% of finance requests related to acquisition – a “remarkable progression”, says Laxfield, given that acquisition-related finance accounted for just 12% of the total in 2012, when the market struggled under the weight of legacy loans.
The firm offered two reasons for this rise in acquisitions finance. Firstly, lenders are working hard to retain borrower loyalty and have been “quietly trading down” margins on two-year extensions to avoid a competitive, full market refinancing process. Second, investors are under pressure to maximise financing structures to improve returns.
While almost half of all loan requests during the period had a loan-to-value (LTV) ratio of just over 65% there were fewer LTVs of 70% or more – either indicating that borrowers have become more cautious, or that more aggressively leveraged borrowers have worked through short-term hold strategies and are looking outside the UK for dislocated markets with more yield compression opportunity.
While the headline LTV figure is fairly conservative, valuations are now on average around 35% higher than at the lowest point in 2008. A downturn comparable to that of 2008 could put many loans in excess of 100% of value.
The Barometer also shows the growing strength of the smaller loan market.While big-ticket loan requests dominated the pipeline by volume in Q2-3, with 60% of requests worth £100m or more, 60% of the loan count pipeline is for deals worth less than £50m.
Rise in smaller-ticket deals
“Activity continues to spread out of the core market and into smaller tickets,” Emma Huepfl, head of capital management at Laxfield, said.
There was also strong activity in the regions, which now outstrip London in terms of demand for finance. The last time regional activity was this strong, in 2012, the reasons were very different, reflecting legacy loans, many of which were in breach of LTV covenants and could not find capital willing to replace the old structures. This time, demand for finance matches regional acquisition activity, with 60% of regional loan requests being acquisition-related by volume and 57% by loan count.
Demand for alternative asset finance declined somewhat during the period but remained high relative to historic levels, accounting for 40% of requests. Student accommodation, hotels and residential accounted for a combined 21% of the pipeline, compared with 29.6% in the prior survey. An increase in expected pricing saw lenders expect better compensation for the additional risk of alternative assets.
For the first time, the Barometer included loans below £5m and development deals, reflecting increased activity in both areas. Over Q2 and Q3, Laxfield received 48 small loan requests with a combined £111m volume. Average LTV ratios over the past three quarters were 54-58% and pricing expectations were considerably higher than in the larger-ticket market, at a premium of circa 150-200bps at all leverage points.
The firm received 30 development loan requests in the past two quarters, totalling £1.3bn. Strong residential demand was characterised by large individual loans on jumbo schemes.The pricing premium was typically 400-600bps, depending on leverage.
Launched in January 2013, the Barometer provides an overview of UK commercial real estate market financing requirements, measuring current statistics against a data pool exceeding £75bn across 904 deals, collated since the Barometer’s inception.