UK real estate investors have reacted with concern after the Bank of England lifted the interest rate by 50 basis points on 22 June, saying the decision will continue to place pressure on those struggling with the cost of debt and would further delay market recovery.
The Bank of England’s Monetary Policy Committee voted by a majority of seven to two to increase the rate to 5 percent, leading the financial markets to bet on a 6 percent interest rate increase by year-end.
Natalie Breen, global head of strategic development – real assets, at financial services provider Apex Group said: “For UK real estate investors, this means conditions will remain challenging at least in the short term due to the rising cost of debt.
“Generally speaking, in the UK, the issue is not around the availability of debt – as we are seeing increased sources of debt – but rather the general affordability of debt taking into account the increased rate and reduced loan-to-values which lenders are now seeking.”
One impact of these increased funding costs, Breen said, would be on transactional activity. Transactions declined by 60 percent in the UK for the first half of 2023 compared to the previous year, according to property adviser Allsop, in figures released on 22 June.
To accommodate higher costs of debt, would-be buyers need to bid for assets at prices that are lower than current market valuations. But prices that reflect this are difficult for sellers to accept because they need to repay loans originated at higher values.
Breen said: “Investors were hopeful that in the second half of 2023 we would start to see signs of a recovery in the market. However, with inflation becoming stickier than predicted and interest rates continuing to rise, it appears that signs of recovery in the real estate markets may prove more elusive than first thought.”
Deepak Drubhra, co-founder at London-based debt advisory firm Westfort Advisors, said: “The asking prices haven’t fallen to level which reflects the current costs of debt and I have sympathy for valuers in this market.”
He added: “There are very few buyers out there at the moment. Many of our clients, whether they be institutional or family offices, are exploring credit strategies rather than direct investment, as equity returns are hard to justify in this market.”
Exposed sectors
Roger Clarke, chief executive officer of IPSX, the regulated stock exchange for commercial real estate, added that valuations “will remain under pressure” across the board as interest rates continue to rise because investors are also demanding a higher yield.
He explained: “As the risk-free rate rises, the required returns from real estate must continue to rise as well, explaining why we are seeing yield expansion – and thus valuation falls – even as rental growth continues to be delivered. Until rates start to fall, it is hard to see these valuation trends changing direction.”
Clarke also warned investors most adversely impacted would be those exposed to sectors where rental expenditure and growth is discretionary or linked to GDP. “Turnover rents in retail, or rents from anything other than the very best offices, now look very exposed,” said Clarke.
Paul Oberschneider, chief executive of Hilltop Credit Partners, a London-based real estate lender, said the UK’s central bank “continues to get it very wrong”.
“The UK is precariously positioned, with real-term UK wages at 2005 levels and the impact of the government’s covid bailout now finally catching up with the Treasury,” he said.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: