Reality Check Q4 2012

26th February 2013

In the latest Reality Check, Stuart Buchanan of Acuitus Finance looks at the property funding market in the final quarter of 2012 and reports on the most positive funding market since 2008:

This is the most positive lending environment I have seen since 2008. A number of mainstream banks are looking for new lending business and all have large lending targets for this year.

The specialist lenders are telling the same story and have an appetite for lending which is far greater than in the last few years.

This new positivity has seen the start of some interest rate reductions with a number of lenders offering interest rate margins at around 0.25% below what they were in the second half of last year. This is the welcome change to the steady rise in margins that have prevailed since circa 2008.

Interestingly, these reductions do not seem to directly link to the Government’s Funding for Lending scheme as the lenders offering reduced rates are not using FFL for property finance.

The new lenders who have been trying hard to make a difference during the past two years are also increasing the size of property loans with borrowing of £10m now commonly available. Lenders are also reducing fees and margins as the regulators’ capital requirements for new lenders start to reduce.

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, in many cases a lender will be more interested in the property than the borrower.
  • 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, unless they are multi let and well located with one or two specialist lenders.

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 reduced slightly since the start of the year, in most cases by 0.25% with average margins 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 reduced during the last quarter, and three-month Libor is about 0.03% above BOE base rates. 
  • SWAP Rates: Swap rates remained within a low range of 1 – 1.3 % during the last quarter of 2012 and into the start of 2013.

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 /