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 at auction.
The Lending Outlook
The lending market at the end of last year got a little tougher
with the majority of lenders increasing their margins, and the
average margins for strong covenants increasing to a range of
2.75-3.25%. At the same time three-month Libor reached its highest
level of the year.
Several lenders started to tighten their criteria for lending on
commercial investment properties. The worst affected asset type was
multi-let offices with short-leases for which there appears
to be very little appetite from a lenders.
During the final quarter of 2011, several lenders withdrew from
the commercial property marketplace. Clydesdale/Yorkshire Bank and
Nationwide closed their book to new clients, and for existing
clients it appears that they are only looking for selected quality
The level of enforced refinancing increased as Irish Banks and
several UK banks continued their policy of not wanting to renew
loan facilities that were due for "non- core" clients. This is
leading to a large volume of business hitting the desks of the
lenders who still have an appetite. This, in turn, has led to a
slowdown in the processing of loans.
On average, in the current market, refinancing deals are taking
at least three months from start to finish.
The good news for borrowers is that swap rates remain at
historic lows. Five-year swap rates moved within a range of
1.4-1.8%. 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 in a very attractive environment.
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
- 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 now seven major lenders that are
currently reducing their UK property exposure, and it is expected
that they will pursue this strategy for the next 2-3 years.
Accordingly, when looking for finance, these lenders should
be discounted from the outset.
facilities: they are still available for good
- Watch the lease length: don't
let your property's lease become too short before initiating
refinancing. Properties with leases of less than three years in
length are mainly not able to be funded.
- 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 in these regulations - which seems unlikely - this
trend is here to stay.
- Lending Margins: On average,
margins have moved up by another 0.25% compared to Q3, when they
also moved up on average by 0.25%. They have now increased by 0.5%
on average during the second half of 2011. The average margins are
now between 2.75 - 3.5%.
- Loan-to-Value Ratios: It is
unusual for commercial property investments to be able to attract
finance with more than 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
- Base and Libor Rates: There is
a general consensus among lenders that Base Rates will not increase
during the next twelve months. Libor Rates have increased during
the last quarter, and three-month Libor is about 0.61% above BOE
- SWAP Rates: Swap rates fell
substantially during Q3, with the five-year swap rate staying
between 1.4- 1.8 % for the past quarter.
What's out there?
Example of recent financings secured in the market:
- A portfolio of local covenant shops
with residential above. Loan size / margin: £2.5m at 65% LTV / 3.3%
over a five-year swap rate
- Refinance of unit let to Costa
Coffee. Loan size / margin: £800,000 at 60% LTV / 3.25% over
- Refinancing of a JD Wetherspoon and Pizza
Express. Loan size / margin: £3.5m at 65% LTV /t 3% over a
five-year swap rate
- Refinance of a portfolio of Charity
Shops. Loan size / margin: £1.6m at 50% LTV / 3% over
BOE Base Rate
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