£36bn of fresh senior debt masks secondary financing malaise

Property financing in the UK will continue to fragment this year with as much as £36bn in senior debt masking a deeper and more pernicious domestic secondary financing malaise.

The Association of Property Lenders (APL) and the Investment Property Forum (IPF) have, through the Real Estate Lending Forum (RELF), collated the lending intentions of 36 senior debt providers in the six weeks to 8 February.

RELF’s findings – albeit provisional – are somewhat prosaic.

First the stats. This year, according to RELF, there will be an £8.7bn increase in available senior debt capital this year to £36.3bn, comprised of £23.11bn in new lending, £8.57bn in refinancings and £3.76bn in loan restructurings.

Almost half of the 36 respondents (17), reported that they will increase their 2013 lending by more than 50% of last year’s total.

Historically, aggregate, optimistic – and anonymous – lending intensions tend to shrink, often dramatically. Last year there was a £5bn difference between lending forecasts and actual, at £28bn and £33bn, respectively.

In addition to the possible exaggeration of £36.3bn, the total also does not distinguish between prime, secondary and tertiary property – for which the gulf ever widens.

Last month, Deutsche Bank’s research team wrote that the absence of senior debt for secondary property would act as a catalyst for up to a further 20% decline in capital values over the next two to three years.

The worse gets worse, while the best continues to improve.

No meaningful part of this estimated £36bn of senior debt capital will be deployed in distressed property, which curtails a credible optimistic interpretation of RELF’s findings.

Back to RELF’s useful findings. Average loan margins are at 297 basis points – with a spread of 225 to 400 bps – while LTVs average at 66% for senior debt.

The split between banks and non-banks remains significant – with banks at £29.56bn compared to £5.88bn for insurance and senior debt funds combined.

The £36.3bn estimate is reduced to £35.4bn, based on mid-points from range answers taken as opposed to each respondent’s highest figure.

William Newsom, senior director at Savills, said: “I am fascinated that the category of ‘other lenders’ only managed in 2012 to lend less than a quarter of what they had been intending to at the start of the year.

“I am assuming that this category encompasses non-regulated lenders such as senior debt funds and mezzanine providers, about whom I am hearing of new players coming into the market almost every week.

“Clearly the fundamentals – i.e. low LTVs and high margins, are very attractive to them.  I think the statistics reflect that these players are poised for action and that we will be hearing more from them over the months and years to come.”

Max Sinclair, chair of RELF, said: “It is encouraging to see that the market appears to have reached a floor in terms of funding capacity, albeit that many of the lenders appear to be chasing the same deals.

“What the market now needs is for a few of the indigenous ‘new lenders’ to step in with more meaningful amounts of capital so that some deal momentum can be gained.”

Returning investment banks and new lenders are enticed by sustained high margins which offer compelling risk-adjusted returns relative to other asset classes.

In the last 12 months it has been less the indigenous new lenders coming to market, than US insurance companies and investment banks returning, such as MetLifeMassMutualPricoa Capital Group as well as Wells FargoBank of America Merrill Lynch and, more recently, Morgan Stanley.

On the domestic front, M&G Investments has had a strong run in the last 18 months, and is currently on the capital raising trail along with the likes of Aviva Investors, Henderson, and AgFe, while Legal & General Investment Management is also starting to seize the enduring opportunity.

Such has been the influx of new and returning lenders, that IPF research director Pam Craddock said in a presentation on 13 February at Mayer Brown’s offices outlining RELF’s findings that 10 of the 36 survey contributors have been active in UK market for five years or less.

One example cited by Craddock was the £400m five-year senior loan extended by Standard Chartered, which financed the sale-and-leaseback of a portfolio of 12 Spire Healthcare hospitals to a consortium majority-led by Malaysian pension fund Employees Provident Fund.

EPF’s sway with corporate bank Standard Chartered was the significant pull in closing what was one of the largest single bank UK property loans in the last five years, and testament to the influence of investors’ ability to persuade relationship banks to follow their clients’ business interests.

Despite the size of the loan, CoStar News understands that this does not herald a new property lender so much as a bank willing to lend substantially against property for its core clients.

RELF’s survey also indicated a tangible thawing in development finance, with up to £4bn likely to be lent from 12 lenders willing to fund developments. Of these, four are prepared to lend to speculative schemes.

Already this year, Helios Capital and GWM Group have funded a £85.5m two-and-a-half-year construction loan for the speculative development of the planned 317,000 sq ft Aldgate Tower in the City of London with a projected end value of £200m, as revealed by CoStar News one month ago.

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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