Each quarter in Reality Check,
Stuart Buchanan of Acuitus Finance reviews the current property
lending outlook and gives examples of financing that has been
secured on the type of assets that are regularly offered for sale
Q3 2011: The Lending
Stuart Buchanan of Acuitus Finance comments: "Encouragingly,
several new lenders have come into the market during the third
quarter of the year. They are providing both an alternative source
of finance and offering commercial loans with much lower stress
rates. These new lenders will often look at a borrower's overall
income position. This is enabling higher loan-to-value ratios to be
achieved - sometimes as high as 75%.
"As a whole, Q3 saw property lending remain reasonably active as
many UK and Irish banks continue to divest themselves of their
property loan books and borrowers have to look elsewhere for
"There was further positive news for borrowers as swap rates
continued to fall. Five-year swap rates tracked down and touched
1.4% during Q3.With the market expecting the Bank of England base
rate to remain at its current low level, investors looking to
secure long-term rates are seeing a very attractive
"Looking ahead, investors who are planning to refinance to
unlock equity, buy a new property or who have an existing property
term loan coming to an end during the next six months, should
consider the following:
- Start the process
early: a typical finance deal is taking on average
three months from start to drawdown.
- Find the right
lender: there is no longer one lender who finances
all properties. There are five major lenders currently reducing
their UK property exposure in 2011 and it is expected that they
will pursue this strategy for the next 2-3 years. Accordingly, when
looking for finance it makes sense to discount these lenders at the
facilities: they are still available for good
- Watch the lease length: don't
let your property's lease get too short before initiating
- Loan Terms: In the
year to date, the majority of lenders have moved to offering loans
with a maximum term of five years. This has been mainly due to the
new Basle III banking regulations which require banks to hold more
capital on their balance sheets for longer term loans. Unless there
is a change to these regulations - which seems unlikely - this
trend is here to stay.
- Lending Margins:
Margins have either remained the same during the last quarter or
have edged up to 0.25% as lending between European banks has become
more cautious and swap rates have reduced. Average margins are now
around 2.5 - 3.5%.
- Loan-to-Value Ratios: It is
unusual for commercial property investment to be able to attract
finance with more than a 70% Loan-to-Value ratios. In order to
achieve this LTV ratio, lenders will inevitably require the asset
to be let on a lease term of more than 15 years.
- Break Clauses:
Regardless of the term of the lease, all lenders now assume as a
matter of course that if there is a break clause in a lease then
that is when the lease will end. There is no optimism in their
analysis of these situations.
- Base and Libor Rates: There is
a general consensus among lenders that base rates will not increase
during the next 12 months. Libor rates have increased during the
last quarter with three-month Libor now about 0.5% above BOE
- SWAP Rates: Swap rates fell
substantially during Q3 with the five-year swap rate staying under
2% for the past two months.
What's out there?
Example of recent financings secured in the market:
- An ASK restaurant with a 15-year
lease was refinanced at 65% LTV at a margin of fixed for five
years. Loan size/margin: £900,000 / 2.75% over the five-year swap
rate reflecting all-in rate of 4.15%.
- Refinance of a mixed residential and
commercial investment portfolio with the residential loans
secured on a 25-year unbroken term and the commercial on a 15-year
unbroken term. Loan size/margin: £3m / split loan at 3% over the
five-year swap rate and 3.6% over BOE base rate.
- Refinancing of a charity shop
investment with a fresh lender which required a high LTV to
avoid using cash to reduce the existing loan due to the current
interest rate stress tests. A 75% loan-to-value was achieved using
the client's surplus company income. . Loan size/margin: £750,000 /
3.3% over BOE base rate.
- A development loan for a Mayfair
residential property with a gross development value of
£6.5m. The loan was 65% of the purchase cost and 50% of the
refurbishment cost. Loan size/margin: £2.7m / 3.75% over BOE base
- Unlocking equity from an unencumbered
commercial portfolio of long and short leases with a mixture
of tenant strength to allow the purchase of new properties. Loan
size/margin: £3.7m / 3% over Libor.
If you would like more information on any
of the points raised here or need to discuss financing, please
contact Stuart Buchanan at Acuitus Finance:
Direct line: + 44 (0)20 7193 2108
/ Mobile: +44 (0)7879 432868