Reality Check Q3 2012

8th November 2012

Stuart Buchanan of Acuitus Finance looks at the property funding market in the third quarter of this year and reports on the return of development finance in the latest Reality Check:

Development finance appears to be slowly making a comeback with at least 12 lenders now providing facilities for schemes in the £1m-£5m range,

All of these lenders are focusing primarily on central London opportunities. Available finance diminishes the further you get beyond the M25. There are no more than five lenders currently offering development finance outside of the south east.

The standard range of development loans are from 60% of costs to as high as 80% of costs in central London. Pricing ranges from 4% over BOE base rate to 10% over Libor with both initial and exit fees.

From a broader perspective, the property lending market remained stable during the Q3 2012, with interest rate margins remaining in a range of 2.75-3.5% which has been the prevailing level this year.

On a positive note swap rates have fallen to historic low levels dropping as low as 0.9%, the BOE base rate is expected to remain at its current level of 0.5% for the remainder of the year and throughout 2013. The Libor rate has reduced to almost base rate levels at 0.53%.

The lenders, who were active in the property marketplace during the first half of the year, remained active throughout the third quarter with all of them continuing to look for new business. However, some have reduced lending on retail investments due to over-exposure on their balance sheets.

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 draw-down.
  • Make the right approach: it is vital to approach the right person at the right lender. An approach to the wrong office can result in that source of lending being permanently closed.


  • Interest-only facilities: they are still available for good quality properties or with a lender charging an above average margin.
  • Watch the lease length: don’t let your property’s lease become too short before initiating refinancing. Properties with leases of less than five years in length are mainly not able to be funded.

Reality Checkpoints

  • Loan Terms: Most lenders are now using five-year term loans with 15-20 year amortisation profiles which are a consequence of the Basle III rules. There are a few lenders which are mainly building societies offering 10 – 20 year terms.
  • Lending Margins: Interest rate margins have been stable throughout the first nine months of 2012 with average margins 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% LTV ratios. In order to achieve this 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 twelve months. Libor Rates have reduced during the last quarter, and three-month Libor is about 0.03% above BOE base rates. 
  • SWAP Rates: Swap rates remained within a historically low range of 0.9-1.15% during the second quarter.

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:

+44 (0)7879 432868 /