The demand for debt finance in UK regional property markets is not being matched by lenders, says the latest six-monthly Laxfield Capital report on financing requirements.
The Laxfield UK CRE Debt Barometer, covering the period between Q4 2016 and Q1 2017, finds that the lending market remains 'patchy' with wide variance in availability and pricing.
Senior lenders, particularly banks, are risk-averse. There is strong competition to finance a limited pool of prime assets, particularly in London and the south east, but much less appetite for the 49% of regional properties requiring debt, or for value-add assets.
The barometer found that London debt pricing stayed static but the cost elsewhere went up further, giving an average spread of 63 basis points between the capital and regional deals.
Emma Huepfl, co-principal of Laxfield Capital, said: 'More funding than ever is going to London and the South East, and yet if you look at the agents’ reports on the investment turnover in the regional markets, it has actually been very high in the last three years.
'What we're seeing is that there is a strong level of demand for funding in the regions but that is not being matched by debt capital.'
With fewer lenders and debt more expensive for these assets, in some cases debt is not accretive at all, so borrowers are opting to use all equity, she said.
Volumes down
In the six months, the overall volume of financing requests rose 10.3% to £9.4 bn (€10.6 bn), driven by a pick up in Q1 2017 after a quiet Q4 2016. This compares to £8.5 bn during the previous six months, a time which reflected the 'very suppressed demand' of Q2-Q3 2016 which spanned the EU referendum period.
The £9.4 bn figure, however, is still down on the volumes in the 18 months running up to the announcement of the referendum; in Q4 2015 - Q1 2016, for example, the volume of financing requests was £11.8 bn. Laxfield estimates that the barometer picks up approximately half of UK borrowing requirements.
Partly in line with the rise in regional transactional activity where deals are typically smaller, the latest barometer found that the number of requests to finance smaller assets, with loans of £5 mln - £20 mln, continued to rise, to 173. Large ticket loans (above £50 mln) are still 18% below long term average.
Demand for financing terms longer than five years hasn’t picked up over the last three years despite the appetite of long term lenders and the historically low underlying funding costs; 3-5 year loans accounted for 71% of the pipeline.
The volume of loan requests above 65% loan to value, dropped to £5.22 bn, a substantial decline from the 24 months prior which saw £11.2 bn and £8.26 bn respectively. Margins for loans at a leverage point above 75% actually fell, perhaps reflecting fewer opportunities, while pricing for debt at the 55%-70% point rose, compared to the previous six months.
Development
There were 24 requests for new development loans, one more than in the previous six month period, with a relatively low average size of £58 mln pulling volume slightly below the three-year average. Most borrowers wanted the capital for office or residential projects.
Rob Short of the Property Finance Forum which sponsored the report, said: 'Laxfield has identified liquidity issues which are important for the market, and continue to challenge lenders who are often polarised between the very risk averse, or the high yield lenders. Borrowers need to work hard to match funding to business plan in challenging macro-economic conditions.'
