Borrowers are facing increasing pressure on their returns as the cost of debt rises, but can take comfort in the fact that the number of active lenders remains high.
This was the outlook from Savills’ new head of valuation for UK and cross border, Nick Harris, at the firm’s latest annual Financing Property presentation.
Harris said while the cost of debt was increasing and putting pressure on returns, borrowers would adapt to the new interest rate environment and were generally more focused on the availability of debt rather than cost.
Savills said there were more than 400 active property lenders in the market today, up from 240 in 2018. The growth of non-bank lenders continues to evolve, with debt strategies as a form of real estate investment, now more understood with a focus on growing assets under management.
Harris said: “Borrowers now have a greater choice of lenders than ever before as they navigate the complexities of the real estate finance market.
“This is likely to emphasise the importance of debt advisory, with virtually everything financeable, at a price. Lenders are likely to remain focused on asset selection, quality of sponsors and the cash flow story.
He added: “Future capex requirements are a challenge for both lenders and investors at present, with the market witnessing unprecedented levels of cost inflation, resulting in financial models coming under increased scrutiny.”
The factors that remain in focus for many lenders are a flight to quality, concern around future obsolescence, and the cost of meeting EPC requirements.
While leveraged buyers will be factoring in the changes to the cost of debt, which could impact pricing for some assets, said Savills, there remains a significant weight of money targeting real estate. It said lenders would likely examine rental growth prospects to support their customers in paying keen yields, with that growth arguably coming from those sectors that are short on the right stock.
Mat Oakley, Savills’ head of commercial research, (pictured) said: “Ultimately, the shortage of stock in selected sectors will maintain rental growth and insulate against the cost of rising debt, and with 40% of investors not needing to borrow at the point of acquisition, some will be able to play the market at yesterday’s prices.”
From a residential perspective, Savills said the prospect of further interest rate rises and cost-of-living pressures was likely to put a brake on house price growth in the second half of this year but that the low levels of publicly marketed stock, combined with the extent to which existing borrowers have locked into fixed rates or had their mortgage affordability stress tested, would limit the prospect of price falls over the next 18 months.
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