Laxfield has been analysing annual UK loan requests since 2012 and has amassed a databank of £130bn worth of loan requests across 2,295 deals, excluding sub £5m-sized loans. Loan requests rose by 29 to 296, reflecting £19.5bn worth of financing requests by borrowers.
Average loan size for deals in excess of £5m was £28.4m, reflects Laxfield’s business focus and different dynamics in market financing of jumbo loans (for which significant volume is secured through private placements, club deals and investment bank underwritten loans).
Demand for finance against London assets was below average in 2018, according to Laxfield, while the pricing spread between London and regional assets across the pool was 22bps. This represents a significant narrowing of the premium which has been available on regional assets in the previous three years (average 52bps). LTV requirements in London were lower than in the regions (62% vs 58%), indicating a marginal greater leverage appetite for borrowers outside the capital.
Laxfield identified several themes across 2018:
- Debt Not Driving the Bus: “Overall debt supply is strong. Despite this, demand remains steady, and completed lending reported by Cass has been broadly level for the past three years. A combination of borrower discipline, lender regulation and risk appropriate pricing have acted as brake mechanisms to prevent the market ‘taking off’ on the back of debt availability. Capital values may be full, but debt isn’t currently perceived to be the main driver of asset pricing.
- No ‘Standard Lending’: “Structural change – a constant refrain for real estate investors – but what does it mean for lenders? Single sector, cashflow-based lending is now a rarer commodity, and underwriting debt requires deeper understanding of an equity case and the sponsor’s understanding of property as a service. Obsolescence is happening faster, and repurposing the asset may be necessary to maintain value. The lender’s downside case needs to consider a wider range of outcomes and focus more specifically on the borrower’s ability to anticipate and respond to change.”
- Shifting Definition of Core: “A marker if any were needed about the problem for lenders in underwriting retail, expected pricing for retail loans has more than doubled in the past four years. An acquisition boom in 2014 with associated debt demand saw pricing tighten substantially, before a gradual sentiment reversion. Fast forward 2017-2018 and lenders’ ability to support borrowers in the retail sector has been severely curtailed (for reasons examined later on). In what feels like the blink of an eye, retail has moved from core to specialist asset class, and battering headwinds show no signs of abating yet.”
The Laxfield UK CRE Debt Market Barometer is sponsored by the Property Finance Forum, who support the work done with real loan data to provide participants with market information.
Laxfield’s analysis continues tomorrow.