In the latest Reality Check, Stuart Buchanan of Acuitus Finance looks at the property funding market as we approach the summer break:
The new, more positive attitude among property lenders is probably best illustrated by the fact that one of the major lenders is running a ‘summer sale’ where borrowers will pay no lender or bank legal fees for deals which are credit approved in July and August.
This type of offer has not been seen since 2007, and the new Governor of the Bank of England’s stated intention to keep interest rates unchanged for the next few years is also a boost to borrowers.
Lenders are showing a real appetite to try and do deals. This has been seen with refinancing existing facilities and new purchases which also seems to be on the increase since last year.
The only fly in the ointment is that getting credit approval can still be a protracted process, and there has not been any fundamental change in lending policy with stress tests remaining stubbornly high. This keeps loan-to-value ratios at levels lower than the majority of borrowers would like. Income is another key factor with lenders keen to support five-year plus unbroken leases but not wanting to finance sub five year leases no matter how strong the covenant.
If you have existing loan facilities with one of the lenders who are either exiting or reducing their property exposure it may not seem as if the market has changed. However, in reality your refinance options have improved this year and it makes sense to look around.
Looking ahead, investors who are planning to refinance to unlock equity, buy a new property or who have an existing property term loan coming to an end during the next six months, should consider the following:
- Start the process early: a typical finance deal is taking at least three months from start to drawdown.
- Find the right lender: there is no longer one lender who finances all properties, in many cases a lender will be more interested in the property than the borrower.
- Interest-only facilities: are difficult to obtain, normally your initial loan needs to be at a level where the lender would want to be amortised to at the end of the loan term. Or with a lender charging an above average margin.
- Watch the lease length: don’t let your property’s lease become too short before initiating refinancing. Properties with leases of less than an absolute minimum of five years in length are mainly not able to be funded, unless they are multi let and well located with one or two specialist lenders.
Reality Checkpoints
- Loan Terms: Most lenders are now using five-year term loans with 15-20 year amortisation profiles which are a consequence of the Basle III rules. There are a few lenders which are mainly building societies offering 10 – 20 year terms.
- Lending Margins: Interest rate margins are mainly now reflecting ” Slotting” and are in the 2.75 – 3.5% range for loans between £1m-£10m, for a very strong deal some lenders will reduce to 2.25-2.5% margin.
- Loan-to-Value Ratios: It is unusual for commercial property investments to be able to attract finance with more than 70% Loan-to-Value ratios. In order to achieve this LTV ratio, lenders will inevitably require the asset to be let on a lease term of more than 15 years.
- Break Clauses: Regardless of the term of the lease, all lenders now assume, as a matter of course that if there is a break clause in a lease then that is when the lease will end. There is no optimism in their analysis of these situations.
- Base and Libor Rates: The new Governor of the Bank of England has confirmed that interest rates will not be increasing for the immediate future, he suggested that they will remain at current levels for several years. Three month Libor rates are now at virtually the same level as the base rate.
- SWAP Rates: Swap rates have increased during the past month, the governors comments may see them reduce again, but they may not go down to the levels seen earlier this year.
If you would like more information on any of the points raised here or need to discuss financing, please contact Stuart Buchanan at Acuitus Finance:
+44 (0)7879 432868 / stuart.buchanan@acuitus.co.uk
