Confidence is growing in the UK commercial mortgage market as demand for debt financing seeps into every facet of the market, according to the latest Debt Barometer report from investment manager Laxfield Capital.
Emma Huepfl, head of capital management at Laxfield, told Private Debt Investor: “There is confidence coming through on every measure.”
The report examined £37 billion in loan requests across 392 deals received by Laxfield Capital over the last five quarters – and presents an early picture on how the annual £38 billion UK commercial loan market might look six months ahead of when many of these transactions will close.
The report showed there has been a marked uptick in activity from the fourth quarter last year through the first this year. Leverage and acquisition financing is growing and demand is stronger for financing in the regions, for smaller transactions and in the long-unloved retail sector, it found.
“There is much more activity in the broader market and an increase in smaller transactions reflects more regional and acquisition activity,” Huepfl said.
Loan to value (LTV) percentages have increased from 51.8 percent to 58 percent since the first report was published, covering Q1 2013 to Q3 2013, showing that lending is still restrained in some sectors. However, there was a significant increase in the number of investors seeking LTVs in excess of 65 percent, showing debt is rising quickly in more risky areas.
“There is a divergence between a group of borrowers who are very cautious, for instance REITS, private property companies and institutions [and] another group of borrowers, who are more IRR-driven such as private equity companies, who are using higher leverage to reach their target returns,” Huepfl said.
“In the last six months, 40 percent of borrowers wanted more than 65 percent LTV, and 23 percent wanted more than 70 percent. We’re still at much lower levels than we saw in the years leading up to the financial crisis, but the market has gone up quite quickly,” she said.
Demand for acquisition financing has increased to a point where activity in this sector is at last outweighing refinancing activity, signalling the market is in better health.
By loan count, 66.9 percent of requests were acquisition related over the last two quarters. By size, loan requests for debt refinancing fell from 86.4 percent in 2012 to 45.7 percent in Q1 2014.
“There is much more balance between acquisition and debt refinancing. The debt market has sorted out a lot of the issues of historic debt positions, there are more borrowers looking for acquisitions and there is much more confidence that lenders will be able to finance acquisitions. It is a positive sign and means the market is active and healthier,” Huepfl said.
In smaller transactions (sub £50 million), there has been a strong and continuous increase in the number of loan requests, up from 24.0 percent of the market in Q42012 to 50.8 percent in Q12014.
Interestingly, it seems the retail sector is also coming back to life. There was a large jump in the number of loan requests for retail properties from 22 percent in Issue 1 to 31.6 percent in Issue 2.
“There is a general recognition that the retail sector has suffered a lot over the past few years and a lot of assets are thought to be mispriced, which has led to more interest in the sector and more demand for financing. The high profile failures we saw in the retail market have faded; the sector still has its difficulties, with an oversupply of secondary and tertiary assets, but there is a lack of supply of good assets,” Huepfl said.
“Because the economy has improved, there is more confidence that retail assets can perform,” she added.