Laxfield, in its 9th annual report analysing, inter alia, financing request volumes, pricing, LTVs, provides a barometer for emerging trends in the often opaque and imperfect UK debt market by recording finance requirements at the earliest stage, when borrowers approach lenders seeking terms.
Fiduciary controls between capital, manager and borrower will not be properly tested until a hard or soft property landing occurs, reports Laxfield, but in the meantime, loan origination by insurance and other non-bank capital has expanded to c.25% of the market in five years. Diversification has undoubtedly helped borrowers, but good controls will serve the long-term interests of the market best.
Laxfield identified a number of additional themes across 2018:
- No Return to Covenant Lite: “Whilst institutional appetite to invest in debt has significantly increased, we do not currently see hunger for deal flow leading to loose controls. Covenants have remained meaningful, with lenders retaining an ability to intervene early if deals go wrong. Expectations around borrower-lender reporting are high. We see hard work and attention to shared risks in getting things done.
- Debt Liquidity Waxes and Wanes: “The market remains imperfect and opaque, benefiting lenders with strong distribution capability. Bank appetite changes with time of year, and macro factors can create pauses in debt availability – as we have seen in the past three months with the Brexit question unsolved. Pricing accordingly shifts and for debt investors able to move quickly to respond, there is no lack of opportunity – for borrowers at certain points in time sourcing debt can still be challenging or expensive.”
- The Game has Shifted from London: “The recovering market started in core, but spread out regionally backed by demand for finance. Today our more regionally dominated pipeline reflects an active investment market in the larger cities outside London and the fact that large numbers of assets trade in London without engaging the local secured lending market. Debt requirements are widely spread and borrowers need lenders who understand the economy outside the M25.”
Emma Huepfl, Co-Principal of Laxfield Capital explains:
“Over the five years since we issued our first report, we have seen substantial changes in demand for finance. Strong activity in the regions and mid-market show a healthy depth of activity despite the unresolved political backdrop. As tenants demand more differentiated property, landlords need to anticipate change and be more aware of the need for ‘space as a service’. Lenders need to pay close attention to the operational capabilities of their borrowers and ensure they are capitalised to invest in their assets and maintain occupier appeal.”
Rob Short of the Property Finance Forum, who sponsored the Laxfield UK CRE Debt Market Barometer, added:
“Laxfield has identified changing market features and challenges in areas like retail which need to be properly understood to ensure a successful relationship between debt and equity through the cycle. We are pleased to support this work to broaden the discussion around debt market dynamics and help bring more transparency to the sector.”