Real Estate Finance
A reported £18.4 billion was spent on real estate transactions in the first half of 2023, less than half than in the same period of 2022. This decline has been attributed to the increased cost of debt.
However, borrowers cannot continually postpone their investment strategies. We expect to see real estate investors recalibrating their approaches. They’re likely to use alternative financing models such a joint ventures, crowdfunding via investment platforms, or partnerships. We may see these methods become more prevalent in 2024. The predictability of borrowing costs, even if they are still relatively high compared to years leading up to late 2021, allows borrowers to plan and limit risk. This may lead to an uptick of debt-financed acquisitions as borrowers start to consider longer-term options.
1.
Investment strategies
As expected, in the last year we have seen a slowdown in traditional borrowing for real estate projects. A large estate agent group reported a 60% fall in sales volume, and the Royal Institute of Charter Surveyors reported that 58% of investors still perceive the market to be in a downturn phase. Almost a quarter (24%) believe conditions are consistent with the bottom of the cycle.
Given that the Bank of England has confirmed that current rates will remain until at least 2025, we expect to see real estate investors recalibrating their approaches. In response to stabilised higher rates, they’re likely to use alternative financing models such a joint ventures, crowdfunding via investment platforms, or partnerships. We may see these methods become more prevalent in 2024. The predictability of borrowing costs, even if they are high, allows borrowers to plan and limit risk. This may lead to an uptick of debt-financed acquisitions as borrowers start to consider longer-term options.
2.
Market adjustments
Market adjustments are anticipated throughout 2024, with real estate prices across a range of different asset classes moving in line with the prevailing interest rates. We expect to see this trend continue throughout 2024. However, certain segments of the real estate market could see a shift in demand and preference leading to price increases. We’ve seen this with prime assets in established cities with solid ESG credentials. However, assets that do not match these criteria, particularly in the office sector, continue to fall.
3.
Impact of interest rates on lenders
Increased rates have created a challenging environment from an underwriting perspective. Rental incomes haven’t kept pace with the cost of debt, making it difficult for properties to achieve the debt service and debt yield levels most lenders require. Borrowers generally incur valuation fees, administration charges and legal fees when looking to secure debt. Combined with tightening requirements, most are being risk adverse when assessing an investment opportunity. The result of this is a general slowdown in transactions involving debt. We expect to see this continue throughout 2024 until the prices of real estate have fallen to a more sustainable level.
Key takeaways
- The market is somewhat stabilising, and borrowers are adjusting to a “new normal.” However, the increased strain on the economy due to geo-political issues creates uncertainty which could lead to further interest rates rises
- Borrowers are opting for long, fixed-term debt in real estate assets, in good locations, and with strong ESG performance
- In the current climate, borrowers obtaining debt on distressed assets (particularly offices), with a view to making improvements, may stand to make substantial returns in a growing market
- Cash is most definitely king in this market. Due to stricter lending requirements, cash-rich buyers stand to gain from getting agreements that lenders would not lend against.
Contact
Ayesha Hasan
Partner, Real Estate
+44 (0)755 455 2086
ayesha.hasan@irwinmitchell.com
Contact:
Ayesha Hasan
Partner
+44 (0)755 455 2086
ayesha.hasan@irwinmitchell.com
Key take aways:
- The market is somewhat stabilising, and borrowers are adjusting to a “new normal.” However, the increased strain on the economy due to geo-political issues creates uncertainty which could lead to further interest rates rises
- Borrowers are opting for long, fixed-term debt in real estate assets, in good locations, and with strong ESG performance
- In the current climate, borrowers obtaining debt on distressed assets (particularly offices), with a view to making improvements, may stand to make substantial returns in a growing market
- Cash is most definitely king in this market. Due to stricter lending requirements, cash-rich buyers stand to gain from getting agreements that lenders would not lend against.
Contact:
Ayesha Hasan
Partner
+44 (0)755 455 2086
ayesha.hasan@irwinmitchell.com
Key take aways:
- The market is somewhat stabilising, and borrowers are adjusting to a “new normal.” However, the increased strain on the economy due to geo-political issues creates uncertainty which could lead to further interest rates rises
- Borrowers are opting for long, fixed-term debt in real estate assets, in good locations, and with strong ESG performance
- In the current climate, borrowers obtaining debt on distressed assets (particularly offices), with a view to making improvements, may stand to make substantial returns in a growing market
- Cash is most definitely king in this market. Due to stricter lending requirements, cash-rich buyers stand to gain from getting agreements that lenders would not lend against.