Reality Check Q3 2011

4th November 2011

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. 

Q3 2011: The Lending Outlook

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 finance.

“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 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 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 outset.
  • Interest-only facilities: they are still available for good quality properties.
  • Watch the lease length: don’t let your property’s lease get too short before initiating 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 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 base rates.  
  • 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 rate. 
  • 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