Reality Check Q1 2011

11th April 2011

Each quarter in Reality Check, Stuart Buchanan of Acuitus Finance reviews the current property lending outlook and gives examples of financing which has been secured on the type of assets that are regularly offered for sale at auction. 

Q1 2011: The Lending Outlook

Stuart Buchanan of Acuitus Finance comments:

“Since the beginning of the year, property lending conditions – apart from some increases in pricing – appear to have stabilised.

“Because lenders now have differing ideas about which property assets they want to lend on this can lead property investors to think that the finance market is closed.

“However, if the same property is taken to the right lender they will probably be able to provide acceptable terms. Lenders are being quite consistent with their terms as long as the property asset falls within their lending criteria.

“Investors who are considering unlocking equity from an existing property, need funds for a new purchase or  have an existing property term loan coming to an end in 2011, should particularly consider the following points: 

  • Finance is expected to cost less in the early part of 2011 than in the last quarter.
  • It is important to go to the correct lender for your specific property: 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 outset.
  • Interest-only facilities are still available for quality properties.
  • Don’t let your property’s lease get too short before refinancing.

 Reality Checkpoints

  • 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 increased throughout 2010 and that trend has continued in to 2011. Standard margins now range from 2.25% -3.25%. 
  • 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 ration, 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 element of optimism in their analysis of these situations.
  • Base and Libor Rates: There is a general consensus among lenders that Base Rates and Libor Rates will increase this year. Taking an average of the commonly projected increases, the Base Rate is expected to be at 1% by the end of the year and Libor is also expected to follow a similar pattern. 
  • SWAP Rates: With Base Rates projected to reach 3% by the end of 2012, it is anticipated that SWAP rates will rise throughout 2011.

What’s out there?

Examples of recent financings secured in the market:

Short lease properties

Three properties with lease lengths between 3 and 5 years comprising a bank and two retail investments. The loan was £1.5m at a 58% LTV with a margin of 2.45% over a five-year swap rate and a five-year term loan.

Financing to enable new purchase

An unencumbered Co-Op supermarket was used as security for a five-year interest-only facility to buy another investment property. The loan was for £1.2m with an initial 5-year interest only period and then a 10-year capital and interest repayment term. The margin was 2.5% over a five-year swap rate.

Bank & supermarket portfolio

A portfolio consisting of two banks and two supermarkets with a combined value of £4m and with unbroken leases between 10 and 15 years.  The loan was for £2.2m with a 55% LTV, the interest margin was 2.25% over Libor with a 20-year amortisation profile.

Mixed commercial and residential portfolio

A portfolio of 5 commercial and residential mixed investments with local covenant commercial tenants. The portfolio was valued at £1.5m. The loan was for £1m with an interest margin of 3% and a 20-year capital and interest loan. 

Hotel/fast food outlet development

Finance to build a turnkey hotel and fast food outlet using two existing investment properties (a Tesco and Wickes stores) as security. £4m loan with an interest margin of 2.75% over BOE base rate.

Enterprise Inn pub purchase

Finance for an Enterprise Inn pub, the loan was 55% LTV at a margin of 3.3% over BOE base rate with a 7-year term and a 15-year amortisation profile.

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