Bigger slice of total debt now targets acquisitions and small deals, writes Alex Catalano
The UK investment market is picking up speed, with more borrowers seeking acquisition-related financing, especially for smaller-sized loans and retail, according to Laxfield Capital’s debt barometer. Refinancing makes up a decreasing share of the £12.9bn of loan requests for senior and stretched senior debt Laxfield tracked in the past two quarters, and demand for acquisition finance has grown. “The market appears to be solving its debt overhang issue,” says co-founder Emma Huepfl.
Indeed it is now much more balanced; by the end of Q1 2014, the split between acquisition and refinancing debt was 54:46. In contrast, at the start of 2013, borrowers looking to refinance accounted for 86% of the pipeline. Another indicator that the UK market is recovering is the strong and sustained rise in small loans. This has been evident since early last year, when Laxfield initiated its coverage. In the past two quarters, more borrowers have sought sub-£50m loans.
LIFE OUTSIDE LONDON
Moreover, in this small-ticket category, 76% of the finance was for new investment and 58% for deals outside London, signalling that more investment is now taking place outside the big, core markets. “It is a positive sign that so much is acquisition-related and nearly 60% is regional,” says Huepfl. “We see activity flowing out and confidence that there is debt available for those kinds of assets.”
London still accounted for 55% of debt requested by volume, but regional deals have increased in size over the past two quarters, to £78m, as more assets were being pooled for refinancing. Debt-seekers are also diversifying beyond core offices, where there has been stiff competition from cash buyers. Demand for retail-related debt rose significantly, to 32% of the total requested in the past two quarters. Finance for alternative assets, such as hotels, student housing and rented housing, is still in demand. The gearing levels borrowers are seeking have jumped. They averaged 58% over the past two quarters, compared with 52% in the first three of 2013.
AIMING FOR HIGHER LTVS
But this masks differing appetites for leverage. While conservative borrowers are holding the line and sticking to lower loan- to-value ratios – 52% on average – a growing proportion is aiming higher. In the past two quarters, 23% of the debt requested by volume was for 70%-plus loan-to-value ratios. “There’s a divergence between borrowers who adopt strict, self-imposed restrictions on the way they use debt – largely REITs and institutions that borrow – and on the other hand, internal-rate-of-return-driven, private equity-type investors, which appear to need a bit more debt in a rising market,” notes Huepfl.
Most of the debt being sought is still shorter-term, floating rate. Although longer-term loans are now widely available, 78% of borrowers wanted to borrow for five years or under. Fixed-rate loans of seven-plus years made up 12% of the total. “There doesn’t seem to be a big take-up of long-term, fixed-rate finance,” Huepfl says. “I think most investors have a five-year horizon for buying an asset, working it and moving it on. I don’t think the UK market has changed in response to long-term finance being available. There’s more fixed-rate appetite on the lenders’ side than there is investment opportunity at this stage.”