Most commercial property loans taken out by private investors and unlisted property companies are now arranged with a maximum five-year term. Accordingly, every year around one-fifth of the loans come up for renewal.
Given this segment of investors owns around £70bn of assets, that equates to £14bn of loans that need to be renewed each year.
Many borrowers may think the easiest course of action is to let the loan roll over with the existing lender. Increasingly, however, this option is not an option.
In the past five years, many clearing banks have reduced their exposure to the commercial investment market. A principal problem the banks faced was the capital requirement to support loans in this sector. Banks have also amended their lending policies. If you are an investor with a retail portfolio, you may find that your lender’s appetite for renewing loans has reduced.
Similarly, a loan agreed in, say, 2014 may have been approved on the basis of the length of the unexpired leases. However, the expiry profile of that same portfolio today may be greatly changed and this can either result in the renewed loan offer being lower that the current outstanding loan balance or no loan being offered at all.
Out-of-favour sectors
Investment sectors can also fall out of favour. An interesting case in point are bank investments. Five years ago, a bank investment property was seen as a low-risk, good quality lending asset. Today, in the light of the programme of bank branch closures, lenders are very cautious (ironically, particularly the clearing banks) and are reluctant to lend unless the property has a significant length of lease remaining.
Another challenge when renewing a loan is the requirement for a new valuation. But caution prevails among valuers, particularly with retail investments. The debt service cover for a loan is based on a valuer’s opinion of the current rental values in an area rather than the current passing rent – even if there is a long-term lease in place.
With the troubles in the high street, many rental values have been cut sharply, especially in secondary locations.
This can cause investors problems, especially if they are with a lower interest rate lender with more strenuous debt service covenants. This can lead to the renewal being offered at a much lower figure than the balance outstanding.
Property investors may also have different requirements compared with five years ago. A higher net cash flow from an interest-only facility or one with light amortisation may be more attractive now. The need for equity release for new projects, or existing property improvement, can also be important for the investor.
Where does this leave the private investor and small property company in terms of preparing for a loan renewal?
To start, allow enough time to research your options. This should start around six months before a loan needs to be renewed. Decide what your wish list for a new loan should look like: do you want low rates, fixed rates, unlock equity or interest-only?
Challenger lenders
Research the market: there are many new lenders offering different types of loans for commercial investors. This will be easier if you use a good broker. Apart from saving time, many new lenders prefer to operate through brokers.
Greater flexibility from “challenger lenders” can provide you with options not on offer from a clearing bank. But they can charge higher interest rates or have more stringent requirements for personal guarantees.
Interest rate margins are lower for higher value loans. Pricing of 2-4 % is normally available from clearing banks while challenger lenders tend to price at 3-5% depending on loan size, interest-only and loan-to-value ratios, which can be up to 75%.
Specialist lenders, including insurance and pension companies, can offer attractive terms for larger loans, particularly £10m-plus. These can include margins equal to or lower than the clearing banks, fixed rate loans with a 10- or 15-year term, and light amortisation.
Refinancing a loan takes time; don’t expect it to happen in a couple of months. For single assets, allow at least three months and for a portfolio four to six months, depending on the size and how large your solicitors’ real estate department is. You may also need to consider using a larger law firm depending on the legal requirements of the new lender.
So, instead of taking the first option on the table from your existing lender, use a renewal to achieve the type of loan that meets your objectives.
