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Debt insights: current trends

Posted on 6 February 2024

After a challenging year, with rising interest rates and increased uncertainty, there is cautious optimism that we are moving towards a more stable debt market. Here's a closer look at the current trends we are seeing in the real estate debt market.

Deals are still moving slowly

Deals are progressing more slowly than we would normally expect. Several factors may be contributing to this sluggishness, including:

  • Borrower uncertainty (borrowers are questioning whether they are securing the most competitive commercial terms in the market).
  • A lack of consensus on the value of property following falling property values.
  • Concerns about interest cover levels and levels of interest deposits required to give funders comfort.
  • Various other issues currently under the spotlight, for example, cladding issues are causing  liquidity challenges for funders.

Security enforcements

The last quarter has seen an uptick in security enforcements. Much of the debt written in the last few years, was on relatively short terms of 24 to 48 months, and is now maturing at a time when there are no viable or quick refinancing options on the table. This has pushed lenders, under stakeholder pressure, to take enforcement action.

Credit funds

Some credit funds are scaling back their lending activities for the time being, whilst they address asset management issues within their existing portfolio of loans. This is particularly prevalent for credit funds that have exposure to development risk, where inflation and contractor insolvency have disrupted business plans.

Despite this, new credit funds are entering the market, particularly those with capital from the US and the Middle East who are looking to deploy debt funds as a first springboard into the UK real estate market. With a continued paring back of traditional bank lending, it is still very much seen as a good time to be a lender in UK real estate.

Signs of market improvement

Despite the slow pace of deals and the rise in enforcements, there are indicators that we could see a more favourable market environment in 2024 as the market continues to demonstrate resilience:

  • There has been a stabilisation of interest rates together with forecasts predicting a rate reduction, with rates to drop below 5 per cent by the end of the year.
  • All-in interest rates are now at a level where they stack up against yield expectations.
  • SWAP rates increased slightly over the festive period, but they are still down on the spikes seen over the previous 12 months, and seem to be settling at pre-credit crunch levels.
  • We are starting to see growing consensus regarding valuations from sellers, borrowers and funders.

These factors combined will hopefully be much needed good news for concerned sponsors looking to refinance expensive and/or maturing debt, or who are looking to refinance equity cheques they have had to write in recent years.

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