Reality Check Q4 2011: better news for borrowers

10th February 2012

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. 

The Lending Outlook

The lending market at the end of last year got a little tougher with the majority of lenders increasing their margins, and the average margins for strong covenants increasing to a range of 2.75-3.25%. At the same time three-month Libor reached its highest level of the year.

Several lenders started to tighten their criteria for lending on commercial investment properties. The worst affected asset type was multi-let offices with short-leases for which  there appears to be very little appetite from a lenders.

During the final quarter of 2011, several lenders withdrew from the commercial property marketplace. Clydesdale/Yorkshire Bank and Nationwide closed their book to new clients, and for existing clients it appears that they are only looking for selected quality deals.

The level of enforced refinancing increased as Irish Banks and several UK banks continued their policy of not wanting to renew loan facilities that were due for “non- core” clients. This is leading to a large volume of business hitting the desks of the lenders who still have an appetite. This, in turn, has led to a slowdown in the processing of loans.

On average, in the current market, refinancing deals are taking at least three months from start to finish.

The good news for borrowers is that swap rates remain at historic lows. Five-year swap rates moved within a range of 1.4-1.8%. 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 in 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 now seven major lenders that are currently reducing their UK property exposure, and it is expected that they will pursue this strategy for the next 2-3 years. Accordingly, when looking for finance, these lenders should be  discounted from the outset.
  • Interest-only facilities: they are still available for good quality properties.
  • Watch the lease length: don’t let your property’s lease become too short before initiating refinancing. Properties with leases of less than three years in length are mainly not able to be funded.

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 in these regulations – which seems unlikely – this trend is here to stay.
  • Lending Margins: On average, margins have moved up by another 0.25% compared to Q3, when they also moved up on average by 0.25%. They have now increased by 0.5% on average during the second half of 2011. The average margins are now 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% 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 twelve months. Libor Rates have increased during the last quarter, and three-month Libor is about 0.61% above BOE base rates.  
  • SWAP Rates: Swap rates fell substantially during Q3, with the five-year swap rate staying between 1.4- 1.8 % for the past quarter.

What’s out there?

Example of recent financings secured in the market:

  • A portfolio of local covenant shops with residential above. Loan size / margin: £2.5m at 65% LTV / 3.3% over a five-year swap rate
  • Refinance of unit let to Costa Coffee. Loan size / margin: £800,000 at 60% LTV / 3.25% over Libor 
  • Refinancing of a JD Wetherspoon and Pizza Express. Loan size / margin: £3.5m at 65% LTV /t 3% over a five-year swap rate 
  • Refinance of a portfolio of Charity Shops.  Loan size / margin: £1.6m at 50% LTV / 3% over BOE Base Rate

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