London residential bridging loans cross the 100% interest coverage threshold again after more than a decade
For the first time in ten years, Fiduciam, the institutionally backed short term lender, has completed a residential bridging loan over a London residential property where rental income will fully cover interest servicing. This reflects the rise in rental yields on London residential property, as rents have increased strongly while property prices have softened. For the last decade, rental income on London residential property has consistently been insufficient to cover bridging interest rates.
The Fiduciam bridging loan has financed the acquisition of a modern 43-unit apartment block in Camden, for £28m. The current market rent of £2.25m equates to a rental yield of 8%. This rental yield level allows the interest coverage ratio to exceed 100%. Given the size of the transaction, this observation represents a meaningful data point in the evolution of the London residential property market.
Fiduciam provided the acquisition loan at 70% Loan-to-Value for a term of three years. The sponsor, an opportunistic real estate investor, intends to add value by introducing a hybrid co-living scheme targeted at young professionals, corporate tenants and international students. The apartments range in size between 50 and 150 square meters, and come with one to three bedrooms, which provides the variety of units required for the scheme’s implementation. This proposed rental value-add strategy aims to deliver rental income over 10% above the current market rent and would push the rental yield on acquisition price beyond 9%. The 44-space car park in the building will be let to an established national car park operator, to further optimise rental income. Once the borrower has established a stabilised income track record based on its business plan, they intend to replace the Fiduciam loan with bank finance.
As the acquisition was opportunistic, Fiduciam had to deliver within a tight timeframe. Fiduciam’s loan structure was designed to navigate several cross-border complexities since the sponsor is a partnership based outside of the UK.
This loan represents the sponsor’s second transaction with Fiduciam. The previous project was the successful repositioning of a residential apartment building in Shoreditch for student housing, which was subsequently refinanced onto a bank commercial mortgage.
Fiduciam provided its first residential bridging loan in London in 2015, when interest coverage ratios were last in excess of 100%.
Marc Morris, head of underwriting (UK & Germany) at Fiduciam, commented: “Fiduciam’s latest transaction reflects our continued confidence in the London market, underpinned yield growth and resilient fundamentals. The loan benefits from an expected interest coverage ratio above 1.0x, an initial rental yield of approximately 8% on purchase price, and scope for enhanced returns by utilising the sponsor’s experience in the corporate letting and international student markets. The facility was structured with a disciplined approach to risk, with leverage assessed against the asset’s break-up value to ensure strong downside protection.”
Johan Groothaert, CEO of Fiduciam, added: “This deal highlights Fiduciam’s ability to move quickly and execute complex transactions. We continue to see strong opportunities in London, particularly where experienced sponsors are acquiring and repositioning assets to meet evolving demand.”