UK Commercial Real Estate – Assessing Refinancing Risk in 2024-25

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Introduction

  • Following the most aggressive rate hike cycle in recent history, the UK base rate is widely forecast to fall in the second half of 2024.[1] Along with inflation, the Bank of England’s Monetary Policy Committee is also keeping an eye on several economic indicators which, if they continue to deteriorate, may prompt faster or larger rate cuts than expected.
  • Despite this positive development for the commercial real estate (CRE) market, borrowers are facing elevated refinancing risk as a sizeable portion of the £178 billion of debt, issued prior to the pandemic at low interest rates, is set to mature in the next few years.[2] Even if rate cuts materialise in 2024-25, new financing terms will be significantly more restrictive than those on the existing debt. The problem is compounded by reduced collateral, income volatility and constrained capital flows.
  • In the assessment of refinancing risk on an individual company basis, several key factors should be considered: the availability of funding, new borrowing terms relative to existing debt and the resulting financial impact of the transaction, and the ability of existing property assets to generate income.
  • Refinancing risk is nonetheless partially mitigated by the anticipated policy rate inflection, as well as the increasing willingness of investors to lend. Industrial and retail properties, in particular, would stand to benefit as consumer incomes grow. In addition, commercial property debt markets are more resilient than during past stress periods due to lower overall leverage and a more diversified lender profile.

 

[1] The Times’ seventh annual economists’ survey.

[2] Bayes Business School Commercial Real Estate Lending Report H1-2023.

 

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UK Commercial Real Estate – Assessing Refinancing Risk in 2024-25

10 Jan 2024

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