Published by EG on 07/03/23
The availability of finance plays a pivotal part in powering activity in the commercial property auction sector and this was hugely disrupted by the mini-budget at the end of last September. However, since the beginning of this year the lending market has stabilised and it is now possible to get a clearer sense of what finance is available.
After the mini-budget, lenders – like most of us – really didn’t know what was going to happen next. But as the market began to settle down following the change in Prime Minister, we started to see a lot more stability across the lending landscape. Since the turn of the year, commercial property lending rates have fallen by 20-25% from where they were at the end of 2022.
Most positively, the majority of lenders are now actively looking for business as they have seen the fixed rate and gilt markets stabilise. Lenders are accepting that loan covenants now need to be reduced to stimulate lending and – with the BOE base rate at 4% – it is starting to feel like it is at the peak of the latest rate cycle. As a result, we’re seeing interest rate margins on loans being lowered, debt service covenants reducing and also fixed-rate terms being made more attractive.
An increase in business confidence has been further fostered by more encouraging economic indicators. The Office for Budget Responsibility’s October forecasts have proved to be more negative than the reality of the health of the public finance; the treasury has had a windfall from self-assessed tax receipts; the Purchasing Managers’ Index – a measure of activity in manufacturing and services – has risen to an eight-month high rating. And in the latest Monetary Policy Report, the Bank of England has confirmed that “Output is now expected to decline by less than previously expected over the coming year.”
As interest rates have increased, most lenders have taken the decision to reduce the stress test that they would normally apply for debt service. The impact of that is it’s probably helping to lift loans by about 20% over previous debt service stress levels. If we did see any more interest rate increases that may well be affected again. As a rough guide, every half a percent BOE rate hike reduces loans by somewhere around 5-10%. However, further rate increases look unlikely at this time and currently there doesn’t seem to be any sort of stress on liquidity in the marketplace.
Having said that, lenders remain discerning in terms of the type of assets they will finance. Even the energy price increases have impacted this with some lenders less likely to provide finance assets where the underlying occupier may be an ‘energy-hungry’ business such as a restaurant. Similarly, they are less inclined to lend on properties let to relatively new businesses which might not make it through the current economic environment.
In this climate, borrowers would do well to ‘shop around’ in terms of the loan that best fit their needs. Of particular relevance is the Governments’ relaunched Recovery Loan Scheme for which commercial investment mortgages between £250,000 and £2m are eligible. The loans have a benefit for lenders of a 70% government guarantee, which helps them provide attractive loans. The borrower is responsible for repayment of the loan with the guarantee only applying if the lender is left with a loss on the loan.
Interest rate margins are attractive on the new loan scheme with margins of 2.2%-2.85% available for loans up to 50% loan-to-value, depending upon the quality of the asset. The margin increases in line with the loan-to-value, increasing up to 75%.
The new RLS loans can be used to refinance previous Covid support loans, which may have had shorter repayment terms, the new loan can be eligible for interest-only or up to a 25-year repayment term. The loan can also be used to unlock equity for new property purchases.
Of course, if this is better news for the investors who buy at auction they also need a supply of assets to meet their strategic plans. In this respect, the finance market will also play a role. Refinancing loans for certain assets has become problematic.
Millions of people are now experiencing the challenges of refinancing the mortgage on their homes and that is also becoming acute for certain types of commercial properties also. Portfolios that are predominantly retail and secondary office assets have become unpopular with some lenders.
So, with reduced refinancing opportunities, this year is likely to be a time where some lenders are going to have to make difficult decisions to either bring in receivers, or to get clients to liquidate their assets. In both scenarios this is likely to result in an increased supply of stock coming through to auction. At Acuitus we have seen an increase in lenders and insolvency practitioners as well as the borrowers seeking our expert advice.
