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Muchimmo - General - UK, UK CRE Debt Barometer shows growing band of confident investors seeking loans with LTVs above 65%

Date: 05 May 2015

Laxfield Capital, the real estate debt investment manager, has issued its latest Laxfield UK CRE Debt Barometer, which provides a unique early indicator of changing patterns in the UK commercial real estate market by recording finance requirements at the earliest stage, when potential borrowers approach debt providers seeking terms.

This issue has been sponsored by the Property Finance Forum, who support this report and the work done with real loan data to provide participants with information about the direction of the market.

Laxfield collates active requests for real estate finance and compares pools of data quarterly to track changing patterns of demand. This report references requests for funding received since January 2013, drawing on a total sample of 624 loan requests totalling 58.8 billion.

Key findings from the past two quarters

Confidence is increasing, with investor appetite for debt at higher loan-to-value ratios jumping: half of all requests were for loans with LTVs above 65%, compared to 35% in this range in the last Debt Barometer, released six months ago.

The weighted average of LTV ratios however has remained steady at 56%, highlighting a two-tier market with institutional investors, REITs and family offices continuing with a conservative approach to debt finance and leverage, and returns-driven investors seeking high-leverage debt.

Volumes were in line with the average of the last three years and bumper Q3 volumes in 2014 were followed by a relatively steady half-year period, with loan requests totalling 11.3bn during the report period.

As the cost of borrowing continues to reduce, there is increased interest in long-term funding, following a period of muted demand.

Small ticket loan requests, categorised as less than 20m, accounted for 31.1% of the pool - a high figure.

Compared with the previous two quarters, funding requests secured on hotels more than doubled from 6.2% to 17.5% and student housing increased from 5.1% to 8.0%.

Commenting on the findings, Emma Huepfl, Head of Capital Management at Laxfield Capital said:
"Demand for finance from real estate investors in the UK is increasingly two tier. Institutional and private investors continue to have a highly restrictive approach to debt finance, contrasting with a growing group of investors seeking leverage to execute a short-term strategy focusing on higher returns. This is not surprising given that funding costs have dropped significantly, with lower interest rates and margins boosting returns. Furthermore, the economic outlook and low interest rates have produced more interest in longer duration finance, which UK investors have been slow to respond to previously."

Julius Gottleib of the Property Finance Forum commented:
"We believe that statistical information on the debt market is necessary to inform all market participants and give borrowers and lenders early indications of changing risk. Drawing upon real-time loan data, Laxfield gives valuable insight into market direction through this report. A clear note of caution comes from the assessment that leverage is increasing among some borrowers. Despite the continued attraction of real estate relative to other asset classes, values have increased rapidly and a different interest rate environment could challenge the refinancing of highly leveraged loan positions at term."

By William Peterson

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