What does the economic outlook mean for debt markets?

The debt market has been impacted by a number of key events this year, such as the crisis in Ukraine, high energy prices and the repricing of risk. All have contributed to a higher interest rate environment and fears of a recession in a number of countries. However, it’s a complicated picture; the strength of the Dollar compared to Sterling and the Euro is making assets in the UK and Europe appear cheap to Dollar-based buyers. Furthermore, inbound tourism from the US, Middle East and some parts of Asia is up significantly, even on pre-Covid activity levels.

In the UK, SONIA, the base on which most commercial debt is written, has gone up by 200 basis points in the period since the mini budget. While we have seen some reduction since the new Chancellor was appointed, the all-in cost of debt has risen by around 4% in the last 12 months, and this is impacting the pricing of all real estate loans.

Lenders are moderating the LTVs they are prepared to offer, to ensure there is cash flow available for debt service. Depending on the asset class and location, we have seen LTVs fall by 5-10% over the course of 2022.

首先,没有信贷紧缩simil的迹象ar to what we saw in 2008/09. Borrower level LTVs at the start of 2022 were around 20% below where we entered the Global Financial Crisis, and the banks are 2-3 times better capitalised this time around. Debt Funds provide borrowers with a lot more choice than existed before and while they used to be known solely for higher LTV/higher cost loans, a number of funds have diversified their investor base and have access to funding that can be priced at, or close to the cost of, debt provided by large banks. We have seen this in a number of OPRE asset classes such as hotels and self-storage, and it has been difficult at times to differentiate offers received from banks and funds.

在所有资产类别在英国,债券基金甲型肝炎e around a 20% market share, with the banks continuing to be the dominant provider of debt capital, particularly to traditional RE asset classes. But it has been a different picture in the OPRE sectors and funds represent just over 50% of debt capital provided to the transactions our OPRE debt team has closed since the onset of Covid-19.

We believe banks and funds both continue to remain relevant, and we have seen a recent trend of sponsor and clients favouring lower LTV/lower cost debt, often more efficiently provided by banks, as the all-in cost of higher LTV debt has trended closer to their cost of equity.

It’s too early to say as the market is still adjusting. But on the sponsor/client side, those with fixed rate loans or effective hedging strategies already in place for investments are well protected. Those investors with new capital to deploy (equity, debt or special situations) will also be well positioned once the market fully recalibrates.

Not losers per se, but we expect to see a Refinancing Wave in 2023 and 24, which some of our clients have already got ahead of by seeking Refinancing Terms now. Borrowers who have maturities in the next 24 months are going to be faced with a market in which the cost of borrowing has gone up (possibly by double) even on the reduced LTVs now available from lenders. This means they may need to either inject equity into deals to get the best refinancing terms or seek alternative and creative solutions from different lender groups and we are seeing a significant growth in clients seeking our advice and guidance in this area.

You need to scan the entire lender universe for the most appropriate debt product or lender for your particular cost of capital and investment strategy. Liquidity is absolutely available, but it is gravitating to the best located deals for the best sponsors. In some ways, OPRE borrowers such as Hotels and Healthcare have faced a dislocated market for some time and while the challenges are now being seen in other asset classes, I think OPRE borrowers and lenders are resilient and will pull through successfully.

We are pleased to say we have supported several high quality ESG rated loans. It is clear an increasing number of lenders are becoming more prescriptive about ESG credentials, and this is a key part of their underwriting. The financial benefit to gaining the top ESG rating is, however, limited (say 5bps per annum reduction on the loan margin) but we expect this to become more of a binary discussion in the future, i.e liquidity will reduce significantly for non-compliant financings.