According to the 30th annual Financing Property Report of Savills, the UK property credit market is generally steady due to pressure on interest cover ratios (ICR) and debt returns. Despite the decision by the Bank for the second time in a decade to raise interest rates, lending market stability causes some lenders to reduce borrowers' leverage by refinancing, which creates possibilities for Middle East investors. used cars
Murray Strang, Cluttons Middle East Head of Dubai, had this to say about the topic: "Regardless of a new interest rate increase, financing rates and conditions in the United Kingdom are now more competitive than ever before, allowing investors in the Middle East to renegotiate terms of their current installations or change lenders with a variety and competitive price 'challenger banks.' Although hardly probable, on the other hand, the sole danger is that interest rates will increase more cautiously in the coming six to a year."
According to the CASS Lending Survey, which is sponsored by Savills, during the next five years 73 percent of all existing debt is due, with loan maturities anticipated to peak in 2020 owing to huge loans in 2015. Some debtors may thus seek other sources of funding, especially if the values decrease in the interim. With already low yields, it is impossible to replicate present leverage if ICRs are maintained. This would ultimately lead to reduced loan-to-value (LTVs), causing some concern when refinancing.
Albeit many banks cannot or do not want to boost LTVs as a result of legal restrictions and caution, according to Savills, "alternative lenders" may also be drawn to such borrowers as they try to grow their leverage at greater margins, although many depend on the borrower. In the next three to four years alternative lenders may offer tremendous opportunity, hastening the transfer of property debts to the alternative market from traditional banks, which Savills characterized as having around 100 lenders. According to the research, roughly 5.0% of the credit in 2008 accounted for the alternative sector, which had grown to 25% by 2017 and this is regarded to be a conservative estimate.
Savills said in its theme: "Do lenders and investors care about the increasing cost of money?" that over the last year, the underlying cost of money rose in anticipation of an increase in the Bank of England basis rate: in May 2017 the SWAP five-year rate rose from 0.8 percent to approx. 1.3 percent, an increase of more than 60 percent per year, and in May2017 the LIBO rate increased from 0.8 percent to approx. 1.3 percent;
According to CASS, the new levels of origin were widely constant at £44.5 billion in 2017. The refinancing accounted for 51% of the total start-up while the new purchases represented 49%, which means that the lenders replace mature loans with new loans but do not grow significantly. Non-bank lenders in 2017 increased origin by 21% in value, compared with just 3% for UK banks. On the other hand, foreign banks have seen a 34% drop (excluding German and American institutions) in initial transactions as a result of increasing competition and a lack of major core transactions.
The Head of Valuation at Savills, Ian Malden, said this: "The credit sector seems to be performing well compared to a decade ago. Low LTVs and high ICRs came through regulating, caution and a strong economy, and the danger of 'contamination' has been reduced by the diverse lending market. There is no room for complacence, but the present level of equity in the economy will make it less probable if prices fall that a borrower is compelled to give the keys to the lender."
Nick Hume, Savills' Valuation Team Director, adds, "As long as the total cost of funding stays low, as is presently expected, higher interest rates will not result in substantial changes in value or create worry in the lending sector. However, faced with pressure on ICRs and debt returns, some lenders would have to provide a lower leverage that might benefit alternative lenders willing to take greater risks in return for better returns. This is particularly essential when refinancing since, as is clearly seen in the retail sector, steady decreases in values may create areas of stress."
According to Savills, the impact on the commercial property markets in the UK of rising interest rates is likely to be muted. In a macrophase, the positive effect of 45 million depositors receiving greater savings interest would outweigh the disadvantages of modest changes in the mortgage rate. Due to reduced LTVs and more non-domestic investment in the United Kingdom, during the past 20 years, in the investment sector, the relationship between base rates growth and rise in property yields has deteriorated.
Head of commercial analysis for Savills, Mat Oakley says, "The issue for investors is to identify asset types that will generate rental growth over the next five years. We anticipate logistic property to continue to do well, with yearly rent rise of 3 percent on average, although rents in the city have so far climbed by 3.5 percent this year and a similar upward trend is expected on under-sourced key regional markets. Although the news regarding retail remains gloomy, in the next five years, we anticipate some upward leasing in strong sites that are suitable for their catchment regions."
Strang said, "What does this imply for investors in the Middle East?" "In the past 3-5 years, we saw a substantial rise in demand as we look at trends in GCC-financed commercial property investments in the UK. This is because regional cities outside London have developed significantly, and we anticipate the trend to continue, providing attractive capital growth, high rates of return to investors, as well as difficult oil prices and currency fluctuations."