UK real estate debt demand hits post-crisis high

Investors more confident of lender appetite and debt delivery, says Laxfield Capital.

The UK’s commercial real estate debt market has moved into expansion mode, according to Laxfield Capital’s CRE debt barometer.

Demand for financing rose by £13.5bn over the last two quarters, 27% up on the previous six months. Laxfield’s barometer draws on a pool of 496 loan requests, totalling £46bn.

The latest period shows a significant uptick for large-ticket loans, as global equity targets big UK assets. Lenders also are keen on larger deals, as banks and non-bank lenders alike compete to channel capital into financing real estate.

However, the weighted average LTV required dropped to 55%, dampened by more than £2bn of requests from large institutions and corporates looking to refinance at low LTVs.

“And even among those seeking more than 70% LTV, the average request is below 75%,” said Emma Huepfl, head of capital management at Laxfield. “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.”

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 the demand for finance on mixed portfolios, industrial, hotels, student housing and other operational assets. Together, these 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.

Acquisition-related finance has staged a “remarkable recovery”, accounting for 53% of the debt requested in the last two quarters. Sponsors are engaging with lenders at an earlier stage, now more confident of getting funding at or shortly after completion.

Laxfield also found that many current re-financings are returning to the market for a second time, seeking debt at much more attractive rates than their first post-crisis refinancing.

Most of the debt requested is short term, with 85% in the last two quarters being in the 3-7 year range. Despite there being non-bank lenders having significant amounts of capital they want to deploy longer-term, demand for this is still limited.