Navigating the new property finance landscape
Westfort Advisors & Newmanor Law co-hosted a roundtable event last week, with a group of lenders, borrowers and insolvency practitioners to discuss the property finance landscape and the challenges and opportunities presented by the current market.
With values in retreat and lenders remaining cautious about the future trajectory of the market, many borrowers looking to refinance are facing a ‘funding gap’ which needs to be plugged by new equity or whole loan solutions. Clearing banks are restricted as to how much leverage they can offer due to interest cover ratios and stress testing parameters, and consequently challenger banks and debt funds are becoming increasingly busy and able to play in a space lower down the risk curve.
Whilst there is general consensus that the base rate has peaked – and may even come down slightly earlier than expected next year (although a number of attendees thought the drop of 0.75% by next summer seemed optimistic), there are still concerns about the economy tipping into recession and the impact of the ongoing crises in geopolitical landscape. Although the number of UK company insolvencies is on the rise, it was pointed out that this is, to some extent, a belated legacy of the pandemic financial ‘safety net’ being removed. As such, the volume of insolvencies – even though it is spiking at present – is actually almost on a par with the long-run average. Also, aside from the few well publicised enforcements on some big ticket assets, the feeling was that we are currently not see a lot of secured lender enforcements. However, this is expected to gradually change and particularly with development sites the situation is acute with around 6,000 contractors in very critical financial health.
The clearing banks are showing restraint in terms of enforcement and may find it more appealing to sell loans to funds who are more aggressive in their approach with defaulting borrowers.
Lenders are conscious that cash for discretionary spend has reduced. Retail and leisure assets are being viewed as essential and non-essential through the prism of Covid. Residential, student and health-care are still seen as solid sectors. The office sector however is facing particular stresses not least because of the new Minimum Energy Efficiency Standards (MEES) requirements around energy efficiency. The cost of retrofitting properties is often economically unviable but without repositioning these assets, many secondary offices will become stranded.
There was discussion of what the next move will be from global investors who continue to raise capital and could be poised for a spate of value-buying across the UK property sectors. In tandem with this, it is widely expected that new debt funds will proliferate and play a key role in transitioning UK property into the next phase of the cycle.
Whilst “Survive until ‘25” is becoming a common mantra across the property sector, it was agreed that neither investors or lenders will just be able to sit out the current difficulties and will have to be proactive in their approach. The key will be full circle advice whereby parties obtain early advice and keep their discussions going between all stakeholders.
