Key Trends for 2024
10 January 2024
Peritus Corporate Finance COO, Steven Oliver, looks at the figures and crunches the numbers so you don't have to, to bring you the key financial trends for the coming year.
Market Backdrop – The Refinance Gap
Between 2019 and 2022 it is estimated that c€640bn of real estate debt was originated.
Research suggests that based on current interest rates and capital values c€176bn will not be financeable.
This refinance gap could reduce if interest rates begin to fall and we see a recovery in capital values, however the office sector is likely to experience the largest funding gap at c€82bn.
2021-2023 saw a market focussed on industrial and multi-family meaning these sectors will see refinancing in 2026-2027 assuming a 5 year debt term.
The rise of Defaults
Several properties owned by asset managers have already defaulted on their payments over the last year. These include Blackstone, Brookfield, Pimco and RXR.
Blackstone defaulted on a $531m bond backed by a portfolio of offices leased by Finnish company Sponda Oy in March 2023 this year, while Pimco-owned office landlord Columbia Property Trust defaulted on $1.7bn of mortgage notes.
With over €100bn of commercial loans maturing in 2024 in the UK, Germany and France, and approximately €350bn across Europe the market is predicting some stress in what could be a difficult year for refinancing higher leverage facilities.
The Path of Interest Rates
In 2023, all in borrowing costs reached a 20 year high however there is hope that the interest rate raising cycle is at its peak with the Bank of England holding rates over the last [3] monthly meetings however the narrative is that rates will remain higher for longer and we should not expect a rapid reduction in rates during 2024.
We believe Lenders will continue to supply new debt to the market but that LTV’s will be c50-55% driven by ensuring interest cover and debt yields remain strong and this could cause problems for those needing to refinance facilities with leverage over this level.
We have seen downward movement on UK Swap Rates with the 5 year SWAP trading at 3.428% (as at 3rdJanuary 2024) which is c1% lower than the end of September 2023 and the forward SONIA curve has a downward trend falling to below 3% in July 2026 (based on current estimates) and this falling cost of debt should ease the pressure on borrower income covenants as well as helping to underpin commercial real estate values.
Residential Development Finance
Rising interest rates coupled with rising construction costs put significant pressure on the residential development sector with high interest rates cooling buyer demand. Mortgage rates are beginning to reduce which should help home buyer affordability and underpin prices.
There remains good liquidity for development finance in the living sectors (residential, student, care, build to rent) but all in debt pricing remains above trend and this may slow new starts during 2024.
Key Trends for 2024
- If you have a refinance during 2024, ensure you engage early with your lender to understand their appetite and requirements. Seek advice from real estate debt specialists to give you a broad market view.
- When looking at new development facilities ensure you gain a broad market view as there are a range of products and solutions which may meet you needs, its not one size fits all.
- If you are concerned about meeting your loan covenants, seek advice on your options (and how best to negotiate) from your a real estate debt specialist and your lawyer.
- In our view, Loan to Value covenants will remain below trend during 2024 with 50-55% LTV being the ‘new normal’ for investment finance but we are still seeing higher leverage for development debt.
Speak to Peritus
The Peritus finance team bring decades of knowledge and experience to each and every transaction and assessed and reviewed over £1bn of transactions in 2023. We cover every asset class and can advise across the capital stack be it senior, mezzanine or equity financing.
The Peritus team are delighted to be returning to Cannes this year.
Darren Baker, Steven Oliver and David Shaw will be in attendance and would be delighted to meet for a coffee and catch up.
Please click here to contact the team and we look forward to seeing you in March.
