UK real estate debt demand hits post-crisis high

The UK’s commercial real estate debt market has moved into expansion mode, according to Laxfield Capital’s CRE debt barometer.

Demand for financing rose by £13.5 billion (€16.9 billion; $21.1 billion) over the last two quarters, 27 percent up on the previous six months. Laxfield’s barometer draws on a pool of 496 loan requests, totalling £46 billion.

The latest period shows a significant uptick for large-ticket loans, as global equity targets big UK assets. Lenders also are keen on larger deals, as banks and non-bank lenders alike compete to channel capital into financing real estate.

However, the weighted average loan-to-value required dropped to 55 percent, dampened by more than £2 billion of requests from large institutions and corporates looking to refinance at low LTVs.

“And even among those seeking more than 70 percent LTV, the average request is below 75 percent,” said Emma Huepfl, head of capital management at Laxfield. “Things have not gone mad at that end. But we are in a very high value market. People are cautious about getting through a cycle with their financing and the need to underwrite valuation fluctuations.”

With equity rich institutions snapping up core offices and retail, leveraged investors and lenders are having to broaden out into alternative sectors. Laxfield’s barometer revealed a jump in the demand for finance on mixed portfolios, industrial, hotels, student housing and other operational assets. Together, these accounted for 48 percent of deal requests.
“It reflects that more confidence that lending is available much more broadly now. It’s allowing activity to take place in those markets,” says Huepfl.

Acquisition-related finance has staged a “remarkable recovery”, accounting for 44 percent of the debt requested in the last two quarters. Sponsors are engaging with lenders at a later stage, now more confident of getting funding at or shortly after completion.

Laxfield also found that many current refinancings are returning to the market for a second time, seeking debt at much more attractive rates than their first post-crisis refinancing.

Most of the debt requested is short term, with 85 percent in the last two quarters being in the three to seven year range. Despite there being non-bank lenders having significant amounts of capital they want to deploy longer-term, demand for this is still limited.