Real Estate Debt Market Update
January 11, 2024
Pursuant to the improvements in sentiment at the back end of 2023, movements in the financial market reflect an increasingly positive 2024.
SONIA (Sterling Overnight Index Average) Swaps
SONIA swaps are used by real estate debt lenders to hedge floating debt. These rates play an essential role in determining fixed pricing in the market, as lenders lock in their margins through this hedging. As such, when swaps are expensive, fixed-rate debt is too.
SONIA swaps have been on the downward trajectory in the past couple of months partly due to sentiment about inflation in the UK improving. As swaps are largely a function of supply and demand and hence driven by expectations of future rate movements, this downward movement would imply market expectations for potential falls in the BOEBR. The 5-year SONIA swap rate is currently sitting at 3.588% compared to the highs of 5.4% seen in October 2022.
In line with the above, many Lenders we work with are reducing their fixed-rate offerings. We are currently seeing 5-year fixed residential products with margins as low as 0.5% above Base Rate, and commercial products as low as 1.5% above Base Rate.
Reduced Mortgage Rates
Although GLPG does not operate in the regulated mortgage space, we understand many traditional mortgage lenders have reduced their rates and, as a result, there are mortgages available in the market at sub-4%.
As such, we expect to see improved liquidity in the build-to-sell market as developers anticipate faster sales and stronger valuations owing to demand dynamics.
Base Rate Expectations
Importantly, some forecasts indicate that Bank of England Base Rate could fall by Q2 2024, with some market participants suggesting base rate to be as low as 4% by the end of the year.
As many lenders price their products floating against base rate, the cost of debt could reduce across the year. Consequently, individuals will be able to secure higher leverage on investment facilities (owing to improved serviceability) and larger land advances for development (owing to minimisation of the financing tranche).
Alongside adding value to the process through key risk mitigation, thorough underwriting and strong negotiation, our Capital Advisory team at GLPG has established strong and personal relationships with lenders to ensure we achieve the most competitive terms on the market. We leverage our expertise and network to ensure we stay ahead of the curve in this evolving market.