Appetite for debt finance in property rises sharply

Property investors' appetite for debt finance has risen sharply in recent months as intense competition to buy assets drives them to seek higher, riskier returns, according to a survey of lenders.

More than half of all loan requests made to UK commercial real estate financiers in the six months to the end of March were for loan-to-value ratios of more than 65 per cent, the research by Laxfield Capital and the Property Finance Forum found.

That was up from 35 per cent in the previous period.

By comparison, Britain's largest listed property companies have loan-to-value ratios across their portfolios of 25-35 per cent.

Highly leveraged borrowing delivers higher returns for a lower amount of initial equity, but if the value of the property the loan is secured on falls the borrower can quickly lose all their cash.

This was a widespread problem for UK commercial property from 2008 onwards, when it faced its biggest crash in the wake of the global financial crisis.

After the crisis financiers were unwilling to lend more than 60 per cent of the value of the property, rising to 65 per cent last year, according to Laxfield's data. Emma Heupfl, co-principal of Laxfield Capital, said that in the past six months "we have seen increasing evidence of lenders stretching this figure to closer to 70 per cent".

The rise in demand for highly leveraged debt is the latest sign that property investors are keen to take on more risk - a trend that market observers have warned raises the threat of a real estate bubble.

Prices are rising worldwide as investors searching for higher yields turn to property. The global pricing of real estate has become "increasingly aggressive", MSCI, a research company, said last month.

Mayfair landlord Grosvenor last week warned of the dangers of "complacency" and cited record low yields in several of the world's biggest property markets as a cause for "concern about overheating".

Ms Heupfl said the UK real estate market was dominated by two types of borrowers: institutional investors such as pension funds, which remained cautious in their use of leverage, and "investors with short-term, high-return strategies" who are "currently seeking high-leverage debt".

"Funding costs have reduced significantly, with lower interest rates and margins" as lenders compete for business, she said. "It does not surprise us to see this stimulating demand for greater leverage."

In particular, private equity investors are "pushing lenders to provide more aggressively structured deals", she added.

The majority of financing requests were for new acquisitions, rather than the refinancing of existing debt, Laxfield found, another sign of the uptick in investor demand for real estate.

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