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Real estate finance - a more positive outlook ahead?

26 June 2013

A recent survey of lending organisations undertaken by the Investment Property Forum has revealed a marked increase in lending activity since 2012. The results of the IPF / APL Survey of Lending Intentions 2013 suggest a surge in confidence in both the real estate sector and the desire to lend against real estate assets. In this article, we examine the latest developments in our sector and focus on what we can expect in the coming months.

Appetite to lend - 2013

One of the most striking points about this years survey, is the diversity of the lenders who took part, ranging from banks and insurers to debt funds and mezzanine finance providers. Those who contributed to the survey indicated that up to £36.3bn of capital may be earmarked for senior debt lending this year, the majority of which is likely to be provided by the traditional domestic lenders. Interestingly, the balance between new business and the refinancing of existing loans is slowly shifting, although many lenders still face ongoing restructuring of their existing loan portfolios. What is especially striking, however, is the appetite to lend against real estate assets during 2013: the insurance sector aims to double its lending this year, whereas the debt funds and mezzanine finance providers are looking to triple their 2012 total, suggesting a renewed confidence in the real estate sector compared with recent years.

Lending preferences - asset type and location

As in previous years, there are no real surprises here. Lenders are still primarily interested in funding the relatively stable and traditional sectors of office, retail and industrial. Other types of property that lenders will consider include: residential, hotels, hospitality, leisure and healthcare. Anything niche is unlikely to appeal unless the borrower either has an established relationship with the lender in question or is a key player in that particular sector.

The majority of UK clearing banks and building society lenders do not have a particular geographic preference where lending is concerned. This is primarily due to the fact that they operate on a national basis. Naturally, prime real estate is still highly prized, particularly in certain parts of London where demand continues to outstrip supply.

Development finance - in or out?

Of those participants who responded to the survey, one third indicated that they would consider providing development finance. Unsurprisingly, the lending criteria remain every bit as stringent as in previous years, with lenders only looking to fund substantially pre-let and pre-sold projects with quality third party operators on board. Interestingly, a small number of lenders indicated that they would consider speculative development, presumably for residential schemes. This very much echoes what we are seeing in the wider Midlands region just now.

Lending terms - 2013

On what basis are lenders happy to lend in 2013? Here are the three key findings from this years survey:

Loan-to-value ratios (LTV)


ratios have increased across the board since 2012. The average LTV ratio varies quite significantly between the categories of lender: UK banks and building societies average 67% (62% in 2012), whilst insurers have increased their senior LTVs sharply, from a range of 50% to 65% in 2012 to a range of 65% to 75% in 2013.

The majority of the survey respondents stated that their maximum senior LTV ratio will depend primarily on the nature of each individual transaction. Other influencing factors include property type, location, asset liquidity, debt service coverage and covenant strength.


Fewer than a third of the survey respondents provided information regarding arrangement fees. For prime asset lending, responses ranged from 65bps to 250bps, with the majority of lenders quoting 100bps. However, as confirmed in the 2012 survey, the amount of due diligence conducted prior to a transaction does not seem to have an impact on fees.

Relationships with borrowers

Unsurprisingly, previous performance and covenant strength are two of the most important factors which lenders consider when assessing prospective borrowers. Other considerations include the amount of equity in the transaction, whether the borrower has a pre-existing relationship with the lender and the quality of the underlying asset. For many of the larger lenders, however, the ability to lend on real estate transactions will depend on whether the borrower can bring its entire business relationship to that lender, rather than just the real estate transaction in question. In this day and age, relationship lending is key.

Issues for 2013

The following issues were cited by lenders as key challenges for the current year:

Capital constraints

Banks continue to be severely constricted in terms of capital. The development of slotting criteria is a continuing issue for many PRA/ FCA regulated UK banks and has resulted in more restrictive and expensive funding practices for many lenders. This affects both their historic loan books as well as their ability to fund new ventures.

Similarly, as the Eurozone crisis deepens and the new capital adequacy requirements under Basel III are introduced, we may start to see a greater number of the established European banks retreating from the UK real estate finance market, at least for the foreseeable future.

Deal quality

Due to the increased amount of competition at the prime end of the market, there are now fewer transactions for lenders to consider. In recent years, the situation has been heightened by the number of sovereign wealth funds active in prime UK real estate. Accordingly, the number of deals requiring financing in this sector has been in steady decline since 2008.

Credit discipline

There are concerns amongst relationship managers that deals are being rejected at credit level due to the increased stringency of underwriting criteria. This could potentially jeopardise their ability to conduct business relationships moving forward. Unfortunately, stringent underwriting criteria and increased regulation are very much part of the modern banking landscape in 2013 and we do not see this changing in the immediate future.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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