LAXFIELD UK CRE DEBT BAROMETER

Transcription

1 LAXFIELD UK CRE DEBT BAROMETER, published December 2016

2 Laxfield Capital Barometer Key Findings LAXFIELD UK CRE DEBT BAROMETER Laxfield Capital presents the 7th issue of the Laxfield UK CRE Debt Barometer, an overview of current finance requirement in the UK commercial real estate market. The report examines key trends in the previous six month period, measuring current statistics against the pool of data collated since the inception of the Barometer in January As in previous issues, small ticket loans (< 5m) and development deals are analysed separately from the main data pool. The combined data pool analysed by Laxfield Capital now totals billion loan requests across 1,422 deals. Emma Huepfl Co Principal Laxfield Capital U nusual market conditions are reflected across the report, with the six month period covering the quarters immediately before, and after, the UK EU Referendum. pause in international investor activity A produced very low demand for large ticket deals. This was particularly marked in London, where loan requests ran at half normal levels. Q3 saw very active opportunistic trading of mid market assets across a range of sectors, producing a high count of acquisition related finance requests during this period L ow activity in large deals, but an active period for < 50m loan requests, particularly post referendum emand for high leverage was curtailed, LTVs D were harder to determine in a period where valuations were caveated equests halved for finance on London assets, R whilst regional volumes were strong idening margins and uncertainty over debt W supply deterred borrowers from re-financing, but some achieved exceptionally low all in pricing y sector, strong period for portfolio financings, B but hotels and offices well down This report marks the two-year anniversary of PFF sponsorship of the Laxfield CRE Debt Market Barometer. We recognise the importance for the market of information based on real time data, helping our members understand the interaction of finance with real estate investment. This report adds to the evidence that political uncertainty significantly affected real estate activity in Q2 and Q3 and that international confidence is essential to a thriving market. Rob Short, PFF 3

3 Volumes Leverage 5 Total volume of finance demand decreased in Q2 and Q3, representing a fall of 27.2% from the previous report and 24.8% below three year average of 11.4bn per six month period. The decline was strongly influenced by the slowdown of international trading in London. By contrast loan count was high with 169 requests, marginally above the previous period, with very active trading of mid market assets in Q3. Average loan size reduced markedly to 50.83m vs long term average of 85.3m. Loan Volumes and Loan Count over time 16bn 14bn 12bn 10bn 8bn 6bn 4bn 2bn 0bn 10.1bn 122 Q bn bn bn bn Q Q Q Q Q Q bn bn Average LTV requirement this period was 58.9%. This was a period of concentration to the mid range, with a majority of requests being recorded between 55-65% LTV. It must be noted, however, that during Q3, valuations were heavily caveated, and some lenders wrote down headline values on a precautionary basis during loan assessment. LTVs may consequently have been recorded higher. Whilst the overall volume of deals in excess of standard senior (demarcated at 65% LTV) was 28%, it was noticeable that requests for funding above 70% were well down from 2.4bn of total loans in Issue 6 to 0.9bn in Issue 7. As a wider market point, lenders scaled back risk appetite over the past six months, and these statistics indicate that borrowers displayed corresponding caution. At the low LTV end, activity was also muted, reflecting reduced activity in the secured debt markets by large conservative borrowers (REITS and institutions). Deals of 45% LTV and below fell from 6.8% of the pipeline in Issue 6 to just 1.6% in Issue 7. This was a period of concentration to the mid-range Pipeline Divided by LTV Category Q Q LTV Catergory >45% >45-55% 55-65% 65-70% 70-75% 75%+ Demand concentrated between 55 and 65% LTV with general aversion to higher risk during this period. Q Q Catergory >45% >45-55% 55-65% 65-70% 70-75% 75%+ Volumes fell substantially as trading of large assets paused in Q2 and Q3. Loan Count was high reflecting strong trading in mid market. Weighted Average LTV per 5 month period LTVs were slightly above longer term average, but it was a period in which valuations were caveated.

4 Loan Purpose 7 This section filters loan requests into three categories; acquisiton funding, refinancing of debt and refinancing of equity. High levels of acquisition funding requests indicate a buoyant market with confidence in finance availablity. Loan Purpose bn 15 Volumes were down in all areas and refinancing demand was particularly suppressed during the period around the referendum. Combined debt and equity refinancing fell from 6.84bn in Issue 6 to 3.93bn in Issue 7. This reversed the trend of Q1. Borrowers may have been deterred from refinancing by questions over lending appetite and the perception that spreads were widening. In retrospect, a huge fall in five and ten year rates largely offset margin increases during Q2 and Q3, and some borrowers locked into extremely low cost long term funding in this period. Other reports have suggested that banks concentrated on working with existing clients during the period of uncertainty, resulting in fewer deals coming to the open market for refinancing. On the acquisition finance side, it was a very demarcated picture. Large acquisition funding requests (> 100m), already down in Q1, saw further falls in Q2 and Q3. Overall, this report saw a 30.4% fall in acquisition funding requests above 100m. Refinancing demand was particularly suppressed around the referendum period 10 5 Purpose Acquisition Debt Refi Equity Refi Loan Purpose bn % fall in volumes of refinancing requests suggests borrowers were concerned about volatility of debt supply and pricing... By contrast acquisition finance requests for sub 50m deals increased markedly in Q3 with strong trading as UK funds became active sellers. Deals in this category were more than double the previous two year average ( 1.7bn of requests over in Q2 and Q3 vs 800m average per six month period between March 2014 March 2016). 2 1 Acquisition funding requests for deals of 100m and above also saw a sharp decline... Purpose Acquisition Requests >100m Pipeline divided by Loan Purpose 100% 15.32% 12.83% 6.07% 7.54% 2.66% 15,22% 8.70% Loan Purpose 80% 60% 55.02% 54.18% 49.45% 50.60% 38.62% 42.75% 36.94% bn % 20% 0% 58.72% 54.36% 29.66% 32.99% % 42.03% 1 But filtered by loans of < 50m, acquisition funding requests jumped in Q as UK funds released stock and opportunistic investors traded. Acquisition Debt Refi Equity Refi Purpose Acquisition Requests <50m

5 Loan Quantum Pricing 9 The period saw a high loan count overall with 169 finance requests, but average size of individual funding requests was relatively low. By volume larger deal sizes always dominate the overall pipeline, but deals above 100m decreased from 8.6bn to 5bn this period. This is unsurprising given the lack of appetite during the quarter before and after the referendum from international investors who contribute heavily to this category. By contrast, this was an active period for funding requests below 50m, with loan count increasing from 103 in Issue 6 to 134 in Issue 7. Many deals received during Q3 were triggered by opportunistic acquisitions of small and medium sized assets from UK funds rebuilding liquidity. Expected pricing does not necessarily reflect where deals closed, but is based on market conditions at the time the finance request was submitted, (priced at underwriting, repriced at closing if information is available within the reference period). Over the pipeline of deals seen in Issue 7, expected pricing increased by an average of 24 basis points across the pool. The overall trajectory has been upwards for the past twelve months, reversing a period of compression from Q to Q By leverage band, pricing trajectory was substantially higher above 65%, reflecting a shift in expectation from lenders for properly compensated risk. Average expected margin by leverage point Less core sectors saw highest price increases In particular, the biggest jump was for deals in the 20m- 50m bracket whose percentage of overall loan volumes increased from 6% to 21% of the pipeline for the six month period Q Q Q Volume of Loan by Size Category Issue 7 (Volumes) Count of Loan by Size Category Issue 7 (Count) 300 Loan Size C 5-20m D 20-50m F m G 150+ E m Loan Size C 5-20m D 20-50m E m F m G % 55-65% 65-70% 70-75% 75% Taken across mixed pool of loans, excluding development. 9.8% % 21.7% 9.9% By sector, biggest pricing increases were seen in other, a category which includes asset types such as self storage, data centres, sport & leisure and medical facilities. This indicates that lenders currently seek additional compensation for specialist sectors. 12.0% Elsewhere, pricing increases were seen across all sectors except retail. Generally less core sectors saw highest pricing increases. Percentage split of pipeline by Loan Size % Weighted Average Expected Margin Sector Hotel Industrial/Logistics Office Other Portfolio/Mixed Residential Retail Student 80% 60% 40% 20% 0% Loan Bucket 48.85% 50.29% 50.75% 46.55% 59.98% 62.40% 60.74% 16.30% 11.99% 9.61% 17.09% 16.25% 13.07% 11.98% 9.94% 22.44% 21.46% 16.37% 11.72% 14.55% 13.72% 21.70% 11.53% 9.41% 13.61% 6.17% 8.66% 7.26% 3.97% 4.15% 5.68% 7.39% 9.83% Q Q Q Q Q Q Q C 5-20m D 20-50m E m F m G 150+ A large jump in requests in the 20m- 50m deal bracket helped to build loan count to highest recorded levels, even though volumes overall were down Issue 6 Issue 7 Q Q Q Q3 2016

6 Loan Term Sector 11 Average term requirement was 6 years, but it was a strong period for >7 year requests, which formed 25% of total pipeline. This continues the trend of the previous report, suggesting that low long term rates have increased investors interest in extending maturities. By sector, finance demand was spread broadly, with non-core sectors, accounting for 51% of the pipeline. This partly reflected a below average contribution from offices (reduction from 2.6bn to 1.7bn of loan requests), but also a strong period for portfolio and mixed use asset trading which, unusually, was the single largest category with 24% of the pipeline. An increasing number of deals came to the finance market without a specified requirement for fixed or floating rate financing. Many of these have funding requirement of 7-10 years, the crossover point between bank and institutional funding. We increasingly see borrowers seeking to compare fixed and floating rate market terms before deciding whether to accept yield maintenance or seek more flexibility from a bank style (floating rate) lender. After a bumper period last issue, substantially less finance demand was seen for hotels, reflecting waning international interest during the referendum period. Loan requests fell from 2.25bn in Issue 6 to 844m in Issue 7. Core vs Non Core pipeline split Lower contribution from offices and hotels in this period, but retail and portfolio deals were strong. Pipeline Divided by Duration Requirement 27.00% 26.18% 36.01% 46.79% 41.07% 55.87% 51.29% Q Q Q Q No Data 0-3y 7y+ Q Q % 73.19% 63.99% 53.21% 58.93% 44.13% 48.71% 7y+ 2% 2% 24.9% Core Non Core 27.3% 64% 6-7y 3.5% 71.6% Finance demand by Sector past 12m (Volume) 6-7y 4.7% Loan by Sector Q Q Loan by Sector Q2-Q Student Indu Other Office Student Other Resident Portfolio/Mixed 3-5y 3-5y Resident 7.7% 6.4% 22.1% Indu 8.2% 5.6% 3.7% 23.9% 8.1% 8.2% The last 12 months has seen sustained increased interest in funding with >7 year duration. Borrowers increasingly compare terms from bank style and fixed rate lenders. Retail 15.6% 19.1% 19.5% Hotel 9.8% 20.2% 20.4% Retail Portfolio/Mixed Hotel Office

7 Laxfield Capital Barometer Geography The volume of regional finance demand in Issue 7 increased slightly from 4.7bn to 4.97bn. As a proportion of the whole, however, this was the highest recorded at 58%. In line with the big reduction in large ticket acquisition requests, and lack of international trading in Q2 and Q3, the chart below demonstrates very substantially reduced demand for finance secured on assets in London during this period, a fall from 7.1bn for Issue 6 vs 3.6bn for Issue 7. Another feature of this period was the substantial drop in deal size, which was particularly acute for London assets. London deals in this period averaged 57.3m compared to long term average of 94.4m. Loans by value continue to be dominated by the London and the South East, but loan count showed a good spread of activity, particularly in the North and Scotland, where combined loan count doubled from 18 to 36 during the period. Count of Loan by Region Q Q Count of Loan by Region Q2 - Q South West South West London South East South East London Scotland Scotland North 11 North National National Midlands Midlands Pipeline by Volume London vs Regional % 80% 33.74% 48.08% 42.10% 48.27% 53.72% 40.09% 57.82% 66.26% 51.92% 57.90% 51.73% 46.28% 59.91% 42.18% Q Q Q Q Q Q Q % 40% 20% 0% London National/Regional

8 Supplement A: Small (< 5m) Deals Supplement B: Development Deals 15 We keep information on deals below 5m separate from our main dataset, to avoid high loan count of small deals, and more recent focus on this area skewing the main dataset. Laxfield established a smaller ticket funding line, in 2015, allowing volumes of loan requests in this area to build rapidly in this area. Count of Loan by Region South West South East Issue 7 (Small) Wales London This is the third supplement we have produced in relation to development deals. The information has been collected over eleven successive quarters, during which time 116 deals were analysed with a total volume of 9.34bn. Pipeline divided by Leverage Band Q2 Q LTV Bucket <45% 45-55% 55-65% 65-70% 70-75% 75%+ 65 new loan requests were recorded in this period, comprising 173m in volume. The small loan datapool comprises 223 loans and 555m of volume, recorded since Q Scoll In the past six months, 23 new loans were added in this period, representing 1.48bn in volume. Key Observations Key Observations were North National Midlands There was a decrease in leverage request, as average LTC across the pool reduced from 62% to 58% in the period Demand was down slightly on Q1, with 173m volume of requests vs 223m in the previous six month period. Loan count was down from 84 to 65 Acquisition related finance requests rose slightly as trading of small assets in Q3 created increased opportunity Volumes of loans requested at 65-70% LTC, the previously dominant bracket, declined considerably from 743m to 298m, whilst the 45-55% category accounted for more than half the volume of all development deals Leverage demand is remarkably consistent in this area, and well controlled Counterintuitively, a small tightening was seen in expected pricing in this period, although the range is small (reduction from 383 to 360bps), and still stands at a strong premium to expected pricing at similar leverage across a pool of larger assets Well balanced demand across sectors Reduction of demand for London assets from 45% to 40% this period Count of Loan by Sector Retail Resident Issue 7 (Small) Hotel Industrial/Logistcis Office Expected pricing nevertheless increased during the period by 62bps A very different environment for development financing has emerged in the past twelve months, with lenders scaling back or withdrawing from the market as longer term uncertainty around the economy and strength of the occupational market has emerged It appears from the deal evidence collected that borrowers are aware that supply has reduced, and are structuring deals in the expectation of more conservative lender sentiment Pipeline Divided by Sector Q2 Q Sector Office Residential Portfolio/Mixed Industrial/Loan Student Hotel Other Retail 23% 14% 7% Portfolio/Mixed Other In contrast to Issue 6, which saw more requirement for mixed use funding, demand during Issue 7 was strongest around office and residential assets 35% 63% Loan Volume and Count of Loan by Issue Weighted Average Margin expected pricing by issue m m m m Datapool started building in 2015, and is kept separate from main report to avoid skew. Slight drop in volumes seen in this period Q Q Q Q Q Q Loan 20m 8 Issue 4 Issue 5 Issue 6 Issue 7 Count of Loan Methodology The data captures loans of any size secured on assets undergoing full or substantial redevelopment in the UK, and may include some rental income portion for part of the loan term. Leverage is quoted by loan quantum as a proportion of total cost. In calculating LTC, site and projected build costs are factored in, but no increase in value from completion or letting of the asset is assumed.

9 Methodology Added Loan Data (Main Report) Over the past 2 quarters Q and Q3 2016, Laxfield received 169 loan requests totalling 8.59bn of debt. Pipeline Period Loan requests active between 1 Jan September 2016 (includes some deals originated prior to 2013, with requirement to fund during the reference period). Loan Parameters Pool comprises senior and stretch senior loan requirements secured on mainstream income-producing assets in the UK. Loan sizes span 5m-750m, fixed & floating rate, 2 20 year terms and up to 85% LTV. Issue 7 refers to Q Q Capital Representation During the subject period Laxfield Capital and Laxfied National represented capital providers with appetite for fixed and floating rate loans, senior / stretch senior and junior loans, deal sizes of 5m - 750m, secured on income producing and development assets in good locations within the UK markets. Laxfield Debt Advisory assisted borrowers to structure and source debt on deals above 25m in a wide variety of sectors. ABOUT LAXFIELD GROUP Laxfield is a group of real estate finance specialists providing a range of services to investors in debt and sponsors utilising debt for real estate investments. Since 1995, the Laxfield principals have originated and managed > 10bn of commercial mortgages in the UK and European markets and assisted ten international investors in building or expanding their UK commercial mortgage platforms. Adam Slater MANAGING DIRECTOR Adam.Slater@laxfieldcapital.com Tel: Emma Huepfl CO PRINCIPAL Emma.Huepfl@laxfieldcapital.com Tel: Alexandra Lanni CO PRINCIPAL Alexandra.Lanni@laxfieldcapital.com Tel: Laxfield Group 9 South Street, London, W1K 2XA T: +44 (0) W: