Laxfield Capital UK CRE Debt Barometer

Sponsored by the Property Finance Forum Laxfield Capital UK CRE Debt Barometer Issue 6: Q4 2015 Q1 2016, published June 2016

2 Laxfield UK CRE Debt Barometer Issue 6: Q4 2015 Q1 2016 3 Key findings from the past half year: 1. Large acquisition finance requests halved in Q1 2016, possibly reflecting a market pause ahead of EU referendum. Laxfield UK Debt Barometer Laxfield Capital presents the 6th issue of the Laxfield UK CRE Debt Barometer, an overview of current financing requirements 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 2013. 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 89.1bn across 1,293 deals. Emma Huepfl Co-Principal Laxfield Capital activity was very notably slower for loan requests above 50m in Q1 2016 as the uncertain political environment exercised the minds of larger property investors. Muted trading activity was balanced by investors bringing forward refinancing in a low underlying gilt and swap rate environment, which helped maintain overall volumes. Whilst Brexit troubled decision makers at the larger end of the market, it was largely ignored by smaller investors, and the growth in loan requests below 20m continued. Finance demand for alternative assets was up again, with hotels accounting for 22% of finance requests, balancing the fall in demand in some core sectors. 2. Strong period for refinancing, particularly for longer term debt. 28% of requests were for loan tenors exceeding 7Y (against normal average of 5 10%). 3. Leverage demand down: Loan requests above 65% LTV fell in the past quarter from 45% to 33% of the pipeline. 4. Surge in number of requests for finance secured on smaller assets, although large ticket activity dominates volume. 5. Very strong demand for hotel finance in Q4 2015, but unusually low demand for finance secured against offices. 6. Expected pricing increased in most areas, by an average across the pipeline of 22bps. This rise is fairly insignificant when low underlying funding costs are factored in. Financing of large acquisitions on hold in Q1. Large acquisition finance requests halved in Q1 Q4 2015 Q1 2016 The Property Finance Forum is pleased to sponsor this report for the third time. This forward-looking study signposts market direction and helps investors understand how finance demand interacts with wider real estate activity. Political uncertainty may be clouding the picture currently, but it is interesting to see ongoing restraint around leverage, and a developing trend towards longer term financing. Rebecca Worthington, PFF

4 Laxfield UK CRE Debt Barometer Issue 6: Q4 2015 Q1 2016 5 Volumes Loan Purpose finance requests halved in Q1 2016 for deals > 50m Volumes over the 6 month period as a whole were relatively strong, at 12.02bn across 167 requests, with Q4 2015 still buoyed by the post-election bounce which started in June 2015. In Q1 2016, volumes were notably down, but refinancing demand compensated to some extent for lower trading related activity. 8.0 7.0 6.0 Loans analysed per quarter (volume bn) 5.4 4.9 7.1 7.0 There was an overall reduction in demand for acquisition finance, although on further analysis, this was most acute in Q1 2016, with a clear division between the large and smaller ticket market. For deals in excess of 50m, the percentage of acquisition related finance requests fell from 51.8% in Q4 2015 to 25.9% in Q1 2016. Below 50m, acquisition finance requests maintained levels seen over previous reports at 56.4% and 54.1% of the total for Q4 2015 and Q1 2016 respectively. This is consistent with the market for larger deals being heavily influenced by international investors, many of whom are waiting for the referendum question to be answered prior to deciding future strategy. Trading in smaller assets, however, appears to focus more on current asset fundamentals than wider economic issues. The period of wider market inactivity encouraged some investors to engage in a spot of financial housekeeping, bringing forward re-financings at a time when lenders were relatively free to engage. Requests of 50m and above Purpose (volume): Q4 2015 35% 13.2% 51.8% Purpose (volume): Q1 2016 30.1% 25.9% 44% Loan Volume 4.0 3.0 2.0 Margins at higher levels than in 2015 were largely offset by lower underlying funding costs, particularly in the 10y gilt market which hovered below 1.5% for most of Q1, proving highly attractive to a number of investors who took the opportunity to fix funding for the longer term, some at an overall cost inside 3%. but for smaller loans, demand for acquisition finance was largely unchanged between the two quarters 1.0 0.0 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 Below 50m Purpose (volume): Q4 2015 Purpose category: Volume progression over time 8.8% 7.1 7.0 34.8% 56.4% 6.0 Loan Volume 4.0 5.4 4.9 Purpose (volume): Q1 2016 2.0 11.4% Uncertainty Political uncertainty impacted investors appetite for acquisition finance. 0.0 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 No Data 34.6% 54.1%

6 Loan Quantum Laxfield UK CRE Debt Barometer Issue 6: Q4 2015 Q1 2016 7 Leverage 73% of finance activity by value comprised requests individually greater than 100m, showing that volumes in the UK loan market are still dominated very large deals. Demand for finance against smaller assets has risen however, showing particularly strongly in the 5m 20m bracket, where the number (count) of individual requests rose by 52%. In terms, however, this is a less significant figure, with loans of 5 20m comprising 6.6% of total volume and loans of 5 50m comprising 14.1% of total volume. Leverage demand was restrained in the period, with requests averaging 56.4% in Q4 2015 and 54.4% in Q1 2016. This is below the average recorded over the period since 2012 (58.8%). It was notable that the volume of requests in excess of 65% LTV, (the fairly widely recognised upper end of senior debt ) fell substantially, reversing the trend seen in Issue 4 and Issue 5 when requests received above standard senior comprised almost half the pipeline. Lower demand for leverage was consistent with less activity from trader investors, and more activity in refinancing, as longer term holders of assets often utilise lower gearing than their trading focused counterparts. < 20m Evolution of WA LTV 7.5% 6.6% 20m 50m Loan Quantum (by loan volume) Issue 6 70.0% 60.0% 50.0% 40.0% 53.9% 54.8% 50.6% 47.1% 59.6% 55.8% 55.6% 53.9% 55.3% 56.1% 63.5% 56.4% 56.4% 54.4% 62.3% 12.9% 10.7% 50 100m Whilst demand is strong across the market, in terms, jumbo loans still dominate the overall market inventory. 30.0% 20.0% 10.0% 0.0% > 150m 100 150m 2012... Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Source Data Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Pipeline Divided by Leverage Band progression over time 100% Quantum (count): Issue 5 Quantum (count): Issue 6 > 150m > 150m 100 150m 12.6% < 20m 16.8% 100 150m 6% 35.3% 6% 49.1% 12.6% 21.6% 50 100m 50 100m < 20m Demand for higher leverage fell in the past 6 months, with only 26.3% of the pipeline by volume being for loans above standard senior debt parameters. This may be an anomaly associated with lower acquisition activity. % Loan Volume (issue) 90% 80% 70% 60% 50% 40% 30% 20% 73.7% standard senior 26.3% stretch 24.6% 15.6% 10% 20 50m 20 50m 0% Issue 4 Issue 5 Issue 6 <45% 45-55% 55-65% 65-70% 70-75% 75%+

8 Pricing Laxfield UK CRE Debt Barometer Issue 6: Q4 2015 Q1 2016 9 Loan Term Over the pipeline of deals seen in Issue 6, expected pricing increased by an average of 22 basis points, and further analysis reveals that upward pressure was more acute for shorter loans. Excluding deals of <3y tenor (due to these assets generally involving repositioning and unique price points), the table below demonstrates spreads widening more for deals below five years than for deals with long tenor. This would indicate that banks have been more prone to upward price movement than the fixed rate lenders. Issue 5 Term Avg. LTV Margin (bps) Avg. LTV Issue 6 Margin (bps) Low underlying gilt and swap rates triggered a surge of re-financing activity, which may also have been a reflection of sponsors being less busy with acquisitions in the latter part of the period. A large uptick was seen in borrowers requesting longer term finance. As a percentage of total volume, funding requests in excess of seven years have been relatively low since 2012, running at between 4 and 12% of total requirement. In the past six months, however, there was a marked change, and demand rose to 28.3% of requests seen. The ten year gilt traded below 1.5% for much of this period, giving expected all-in pricing for some core ten year deals of circa 3%. 3-5 Y 60.5% 222 57.1% 2.62% (+40bps) Term (volume): Issue 5 Term (volume): Issue 6 6-7y 59.8% 217 >7y 47.3% 171 60.1% 2.46% (+29bps) 51.0% 1.89% (+18bps) No Data <3y No Data <3y Anecdotally bank lenders have reported that they are suffering higher liquidity costs, some accepting lower profit margins in the past six months in order to deploy capital in a less active market. If this situation continues, and market trading increases post referendum, then bank lenders may hold out for higher pricing later in the year. By sector the trend was towards higher expected pricing in core, but margins for hotel and student housing loans reduced slightly. As more lenders have become comfortable with lending on operational assets in the past two years, the margin premium charged on these loans has, to some extent, eroded. 6 7y >7y 9% 14.3% 8% 68.6% >7y 28.3% 4.7% 5.3% 59.1% 3 5y Pricing in the fixed rate markets was also changeable, as the fixed income markets used to reference rates experienced a fairly volatile period. 3 5y 6 7y Issue 5 Issue 6 350 350 300 300 WA Margin 250 WA Margin 250 Industrial/... 200 Industrial/Logistics 200 150 45% 50% 55% WALTV 60% 65% Pricing by sector 150 45% 50% 55% WALTV 60% 65% Time to fix? A wave of investors brought forward refinancing locking into low long term rates.

10 Laxfield UK CRE Debt Barometer Issue 6: Q4 2015 Q1 2016 11 Geography It was, perhaps, surprising to see that s dominance increased during the last six months, despite reduced acquisition activity in Q1 2016. Strong demand for refinancing of assets, particularly for deals of long tenor helped maintain s dominance in financial activity. By volume, 58.3% of finance requests were for assets based within Greater, although by loan count this figure was lower at 44.3%. Even excluding deals, the pattern of demand for finance links closely with the South East economy, evidenced by concentration of finance requests in the South of the UK. Region (by loan volume) Issue 5 South East North Scotland Midlands South West Region (by loan volume) Issue 6 Midlands North South West Scotland Wales Volume m 0 South East 7.0% 3.7% 4.7% 2.5% 0.6% 1.2% 47.4% 40.5% National 21.8% 58.3% National Q1 2016 Volume: Split by Purpose & Region National continued to dominate financing activity, although acquisition related requests ran at lower than normal levels in Q1 2016. Outside the capital, demand was fairly evenly split between refinancing and acquisition. 846.31 Density of regions by loan volume, exc. National and : Issue 6

12 Laxfield UK CRE Debt Barometer Issue 6: Q4 2015 Q1 2016 13 Sector Sector Volume: Issue 5 Finance Demand by Sector past 12m Sector Volume: Issue 6 For the first time, there was more demand in this period for finance secured on alternative sectors than the traditional office, retail and industrial / logistics assets (which we define loosely as core ). The trend has been moving this way for some time, but the 50% marker is significant when considered alongside the fact that very little funding was available for alternatives in the post crisis years. Since the margin premium for alternatives has contracted significantly during this time, there is little doubt that debt availability is boosting activity levels in alternative sectors. This was a bumper period for hotel related finance requests, and ties in with investment activity in the sector, particularly in Q4 2015. By contrast, activity levels in offices were lower than average. This anomaly may well be referendum related, since prime offices are the traditional territory for international investors, many of whom are holding back until political questions are settled. 12.6% 8.1% 6.5% 15.6% 34% 16.8% 4.4% Industrial/Logistics Finance Demand for Assets, Q4 2014 Q1 2016 2.6% 16.1% 19.3% 6.9% 22.1% 6.4% 25.7% Industrial/ Logistics 2.0 1.9 1.6 1.5 100% Finance Demand Divided by Core and Non Core Asset Security Loan Volume 1.0 0.6 0.8 80% 0.5 0.4 0.3 0.0 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 % Loan Volume 60% 40% 50% No data 20% 0% Initial Issue 1 Issue 2 Issue 3 Issue 4 Issue 5 Issue 6 Core Non Core s This was a particularly strong period for hotel financing, with a cluster of finance requests in Q4 2015.

14 Supplement A: Small Loans Laxfield UK CRE Debt Barometer Issue 6: Q4 2015 Q1 2016 15 Supplement B: Development Financing Laxfield s activity in the small ticket loan market through its Laxfield National programme has boosted the data collected on loans under 5m. To avoid skewing our main dataset, we separate information on sub 5m loans from the main body of our report. This pipeline is building, and now comprises 135 deals with a value of 343.8m. During the subject period, we analysed 84 transactions of less than 5m, with a total value of 222.8m. This is the second supplement we have produced in relation to development deals. The information has been collected over nine successive quarters, during which time, 87 loans were analysed with total volume of 7.1bn. The past six months was active, with almost 2bn of requests seen during the past two quarters. Key observations were: Leverage demand remains controlled. During the past 6 months the average was 57.7%, with a small rise in Q1 where requests averaged more than 60% for the first time (60.2%). Expected pricing remains considerably higher than for larger loans, with an average premium of 140bps over loans in excess of 5m. -related finance demand fell slightly in this period, producing a fairly even split overall between debt refinancing and acquisition-related (including equity refinancing). By volume, & SE accounted for 62.4% of requests. This is perhaps surprising given that there are more deals of smaller lot size in the regions, but reflects that property which relates to the economy still dominates demand. Almost all the activity is in the 3 5 year funding range. Underlying property investment is diverse, with less than half of finance requests being for assets in one of the three core sectors. National North South West Loans analysed per quarter (volume bn): 1,400.0 Region: Issue 6 Region: Issue 6 Midlands 8.3% 10.5% Industrial/Logistics Scotland 7% 3.9% 8% 17.7% South East 44.7% Sector: Issue 6 Sector: Issue 6 5.8% 14.3% 4.9% 3.5% 5.4% 15.1% 25.7% 25.3% Loan Volume 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 528.8 994.2 916.6 Key observations were: 746.2 719.5 676.9 552.0 731.4 Very strong bias, accounting for 88.3% by volume and 61.1% by loan count. This reversed what we saw as an opening up of development financing in the regions during the previous period. By sector, residential accounted for the largest number of individual loan requests, but this was much lower by volume, with the biggest category defined as mixed use. Jumbo loans accounted for 75.3% of the pipeline by volume, although by loan count this figure was only 27.8%, reflecting the bar bell of very large and small schemes which characterized the pipeline in both Issue 5 and 6. Leverage demand was split fairly evenly between bands, although two large schemes with fairly high LTC requirements brought the average up to 64.2% over the period. 1,284.3 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 National Midlands South West South East 8.6% 9.1% 4.5% 11.4% 4.6% 7.1% 88.3% Industrial/Logistics 58.2% 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 the LTC, site and projected build costs are factored in, but no increase in value from the completion and letting of the asset is assumed.

Methodology (figures are for the main Barometer, supplementary sections listed separately): Added Loan Data: Over the past 2 quarters Q4 2015 Q1 2016, Laxfield Capital received 167 loan requests totalling 12.02bn of debt. Capital Representation: during the subject period Laxfield Capital represented capital providers with appetite for fixed and floating rate loans, senior / stretch senior and junior loans, deal sizes of 1m - 750m, secured on income producing assets in good locations within the UK markets. Laxfield Debt Advisory sourced debt for borrowers on deals above 25m in a wide variety of sectors. Loan Parameters: 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. Period: Loan requests active between 1 Jan 2013 31 March 2016 (includes some deals originated prior to 2013, with requirement to fund during the reference period). About the 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 arranged and managed more than 10bn of commercial mortgages in the UK and several European markets and assisted ten international lenders to build or expand their loan platforms in Europe. Adam Slater MANAGING DIRECTOR Adam.Slater@laxfieldcapital.com Tel: +44 20 7518 1615 Emma Huepfl CO-PRINCIPAL Emma.Huepfl@laxfieldcapital.com Tel: +44 20 7518 1614 Alexandra Lanni CO-PRINCIPAL Alexandra.Lanni@laxfieldcapital.com Tel: +44 20 7518 1618 Laxfield Capital 9 South Street,, W1K 2XA, Tel: +44 (0) 20 7493 5026 www.laxfieldcapital.com