1. Interest Rates: what has been the impact on businesses?
- Higher than expected rates: Interest rates have remained higher than anticipated, particularly in the UK. The five-year sterling swap rate is around 4.5%, while the euro rate is just under 2.5%.
- Impact on debt and transactions: This has made debt only relatively accretive, leading to muted transaction volumes. Despite this, Loan-to-Value (LTV) ratios have remained stable, and in some cases, revaluations have led to increased LTVs.
- Interest Coverage Ratio (ICR): Higher interest rates have made ICR a key constraint, making interest reserves potentially essential.
- Lender focus: Lenders are still looking to grow their loan books, focusing on senior and mid-risk opportunities, including mezzanine and construction finance.
- Market dynamics: Property values have plateaued, and the occupier markets are positive with rental growth across various asset classes.
2. Future Interest Rates: where will they be in 12 months?
- Expectation of rate cuts: There is an expectation that interest rates will continue to fall, although predicting the future trajectory remains challenging.
- Economic activity: Significant economic activity is unlikely to resume until 2026. If rates remain higher, there could be considerable activity driven by asset management initiatives.
3. Resilient property sectors
- Office sector: High-quality, sustainable office spaces in prime locations are promising, but caution is necessary as not all office properties will perform well.
- Retail sector: Retail properties with strong tenant demand and high occupancy rates are expected to offer good value. Secondary shopping centres with vacant anchor stores present significant challenges.
- Data centres: Experiencing rapid growth due to increasing reliance on digital infrastructure. However, this sector is complex, with challenges related to power supply and classification as real estate.
4. Distressed activity: are lenders losing their patience?
- Low levels of distress: Despite the economic climate, there are still relatively low levels of distress activity. Significant liquidity in the gap finance space has bridged the gap over the past two to three years.
- Selective enforcement: Lenders may selectively decide to take enforcement action as short-term extensions come to an end. However, there is sufficient liquidity in the market to find alternative refinancing solutions.
5. Opportunities for mezzanine funding
- Competitive market: Back-leveraged transactions have become increasingly competitive due to heightened interest from UK clearing banks and alternative lenders.
- Returns: Opportunities for mezzanine funding continue to be present, particularly with returns around 16-18% on office properties.
6. Impact of a Trump presidency on lenders and borrowers
- Unpredictability and volatility: A Trump presidency brings unpredictability and volatility, unsettling both lenders and borrowers. This can lead to market volatility, affecting interest rates and the overall economic climate.
- Foreign policy concerns: There is particular concern about foreign policy and its impact on Europe, potentially disrupting trade, investment, and economic confidence.
We hope to bring a similar group together again towards the end of the year to reflect on what we have seen in 2025 and look ahead to what 2026 might bring. If you would be interested attending this and other similar events please contact us.
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