Savills sees stress but limited distress in UK real estate debt

Although the cost of debt remains high due to rising interest rates, the UK property market is yet to see many distressed property loans, according to property consultant Savills.

Speaking at the company’s 35th annual Financing Property presentation in London on 24 May, head of valuation for the UK and cross-border, Nick Harris, said there is clearly stress in the loans market, but not significant distress for now. “We are in the early days of how lenders will deal with stretched capital structures,” he said.

“The next few years will also see a significant amount of loans due for repayment and, while not unusual, this activity is being undertaken against the backdrop of rising debt costs, falling capital values and the potential risk of additional capital expenditure associated with ESG.”

He explained, in cases, the cost of financing is more expensive than property owners’ entry yields.

“As a result, capital structures are becoming stretched and where these cannot be cured, we may see an increase in sales – consensual or otherwise – as lenders seek to recover their debt,” he added.

Price discovery

The consultant has observed that pricing for most prime assets is nearing a landing point, although price discovery for non-prime assets remains a work in progress.

Harris explained Savills has seen pricing correct in the UK far quicker than in previous downturns, which the firm notes as a positive for future market activity. Subsequently, the firm expects an uptick in transaction volumes in the second half of this year.

He noted that the number of lenders active in the UK market – which it said last year was around 400 – has remained relatively stable in the past year. According to a survey the consultant conducted, living sectors, residential development and prime logistics are the most favoured UK sectors by lenders.

“While the results of our survey show that there are some very obvious markets that stand out as firm choices for lending and investing, it is also interesting to note the divergence of views for lending into the same markets. Typically, we would expect market views to be broadly aligned, but the disparity underlines some of the fundamental challenges around the future outlook for pricing,” said Harris.

Addressing the commercial property market, Mat Oakley, head of commercial research at Savills, noted expectations for interest rates to come down will support price rises in some areas, with prime logistics and offices predicted to recover first.

“The rationale for investing in logistics remains the same with online retail and onshoring to support demand moving forwards, resulting in the vacancy rate likely to reduce to 4 percent in 2024 and prime rental growth to average at 6 percent per year,” he added.