With plenty of change expected in the property market over the next 12 months, our MRICS certified Director of Debt Finance Greg Manson explains his real estate predictions for 2023.
It has been a tumultuous 12 months for the UK real estate sector – ongoing supply chain issues, labour shortages, inflation, and numerous government changes – have all contributed to uncertainty amongst property developers and investors. The latest data from RICS’ UK Resident Market Survey for example, reveals that new homebuyer enquiries in October decreased to their lowest level since the 2008 financial crash – a clear demonstration of falling consumer confidence in the market.
However, despite this challenging economic backdrop, there are still those who believe the downturn could present opportunities for the sector, and we have certainly seen liquid buyers bracing themselves for a busy festive season. Values across the board are falling with data suggesting that yields are widening (i.e. going from 3% to 4%, 5%, 6%, etc.) We have seen prime industrial yields for example rising from 3.25% to 5% within the last 12 months – it very much appears to be a buyers’ market.
So, what will 2023 have in store for real estate debt?
- Given the base rate is predicted to increase to 4% – 4.5% within the next six months or so, we will likely see lenders sizing facilities based on debt serviceability rather than traditional LTV. This, coupled with what’s happening in the broader economy will also likely lead to leverage levels decreasing;
- As interest rates climb, it could be argued that property as an investment class becomes less attractive – if you can buy US Government Bonds at 4%, why spend 5% on an industrial site in the Midlands for example? Yield widening will create downward pressure on values for commercial property heading into 2023. This can obviously impact a lender’s ability to drive debt quantum on a property investment due to income vs serviceability and LTV. However, one would expect that with high inflation, rental growth will also feature in the coming period, so that needs to be a consideration from lenders too;
- The financial successes of commercial tenants could also potentially be curtailed as they grapple with rising energy costs and wages, as well as stifled consumer demand. This leads to the potential for arrears, vacancies, and ultimately deflationary pressure on rents. So, from a lender’s perspective, the fundamentals of really underwriting tenant strength are well and truly back (though they should have never gone!);
- Many lenders will be focused on protecting their downside risk and minimising losses, rather than originating new loans and growing their loan book, so it will generally be a tougher market to secure debt finance in.
From our perspective, we will continue to size facilities prudently at the outset of conversations with potential borrowers, so no headaches arise when valuations are received, and we will continue to work to borrower timelines, aiming to complete transactions in days if needed.
We’re expecting to see sustained growth in our property loan book in 2023 by supporting sophisticated and well-capitalised borrowers who look for opportunities at reasonable, well-considered leverage. We understand the next 12 to 18 months will present numerous challenges for the real estate sector, but we remain committed to continuing to support strong borrowers, with strong assets and a clear strategy. This was clearly evidenced by our announcement earlier this year around our acquisition of a 50% stake in ASK Partners, a business we have worked with for several years across dozens of property transactions.
So, if you’ve recently had term sheets pulled, or your usual lender’s being slow to respond, indecisive, seemingly lacking in confidence in the sector, or tightening their risk criteria to such an extent that it will be impossible for you to get a transaction over the line, please get in touch and we’ll see if we can help.
By Greg Manson MRICS, Director of Debt Finance at OakNorth Bank
