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.
Q2 2011: The Lending Outlook
Stuart Buchanan comments:”The second quarter of 2011 has seen several changes when compared with Q1. One of the most significant changes is the number of property investors looking to refinance existing loans which are not being renewed by their existing lenders.
“We are now seeing the effects of banks shrinking their property loan books with existing clients being faced with interest rate margins rising to 3-4% or simply no willingness from the banks to renew facilities.
“The Irish banks in particular have little appetite for loan renewal particularly for UK-based investors. The knock-on effect of this is that the lenders who are still operating in the property marketplace are very busy. In quarter one it was possible to get a credit decision within a week. By the end of June the average wait appeared to have increased to between two and three weeks.
“As you would expect with demand from borrowers focused on a shrinking pool of lenders, those lenders are becoming increasingly particular about what deals they want to do. Not surprisingly, this also seems to have generally increased interest rate margins by around 25 basis points.
“Looking ahead, lenders have always traditionally had less appetite for deals in the second half of each year, particularly quarter four. Accordingly, property investors with loan renewals coming up should try and work out their options as early as possible – and allow at least three months if they need to refinance.”
Reality Checkpoints
Loan Terms: The majority of lenders are offering loan terms of five years or less. It is still possible to get up to 20-year loan terms with selective lenders depending on the property to be financed. Typically longer-term loans will have higher margins.
Lending Margins: In Q2, a number of lenders seem to be pricing deals at margins around 25 basis points higher than Q1. When canvassed, no lenders expect margins to reduce this year, or indeed, next.
Loan-to-Value Ratios: There has been little change in LTV ratios with 70% typically being the maximum available due to the high stress tests on income. For a loan to get to 70%, the lease needs to have an unbroken loan term normally in excess of 10 years and at a reasonable purchase yield reflecting today’s prices not yesterday’s.
Break Clauses: Lenders assume all leases end at the first break option, regardless of any positive valuer comment.
Base and Libor Rates: The Market sentiment has changed during quarter two with little expectation of a rise in base rates. Subsequently Libor has remained steady with 3 month Libor just over 0.8%.
SWAP Rates: During quarter two Swap rates have fallen by up to 30% compared with their highs in 2011. This is due mainly to the reduced expectation of a base rate increase during the rest of this year. Property investors who need to renew loan facilities during the next quarter can take advantage of historically attractive five year swap rates.
What’s out there?
Examples of recent financings secured in the market:
Multi-let short-term office investment with mezzanine finance
An office investment with a mixture of short-term leases (up to four years) and some voids. The senior debt was placed at 60% LTV with a margin of 2.9% and mezzanine finance between 61-75% LTV.
Five-year, interest-only facility for residential investment
A £4m portfolio of residential investment properties was placed on a five-year, interest-only facility at 45% LTV at 2.75% margin and a five-year term.
Northern Ireland Portfolio
A mixed portfolio of six commercial properties located in Northern Ireland was placed at 65% LTV. The margin was 2.8% with a five-year term.
Residential development finance
Finance for a development of three large detached houses was placed at 60% of costs. The margin was 3.5% over Bank of England base rate for a loan of £ 2.8m.
Refinancing of Republic of Ireland-based property investor
Dublin-based property investment company needed to refinance from an Irish bank, a portfolio of five local covenant commercial properties. £1.8m loan secured with a 60% LTV and a margin of 3% over a five-year swap rate.
Costa Coffee investment
Borrower required a long-term loan of £850,000. It was placed at 3% over Libor with a 25-year capital and interest term with no reviews after five years.
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
