Another US bank wobbles
Making sense of the latest trends in property and economics from around the globe.
3 minutes to read
First Republic
Following weeks of relative calm, shares in US regional bank First Republic fell by 50% yesterday after it reported $100 billion in withdrawals during the first quarter. The shares are down more than 90% since the onset of the mini-banking crisis that began with the collapse of Silicon Valley Bank.
There were few signs of contagion. The KBW Regional Banking Index, which is down almost a quarter this year, dropped another 4% yesterday.
The key question for real estate investors remains whether or not banks will tighten lending to shore up liquidity, exacerbating the impact of monetary policy tightening. The Bank of England last month noted that UK banks' wholesale funding costs had risen as a result of the SVB collapse, though not above the autumn 2022 mini-budget peaks. It's working on assessing the impact as part of new forecasts due out May 11th.
A clearer playing field
Any further tightening of credit conditions will be a boon for equity-rich investors that are able to take the long view. Indeed, a major theme in this year's Wealth Report was the degree to which wealthy private investors were picking up slack left by the retreat of some institutions.
Grosvenor posted annual results yesterday. Chief executive Mark Preston told the FT that pockets of opportunities were indeed emerging from parts of the market where debt markets were growing tighter.
The paper also spoke to Lisa Attenborough, Knight Frank's head of debt advisory, who said the sharp rise in the cost of debt had generated a “clearer playing field” for investors able to shell out large amounts of cash and rely less on debt.
“The US is where the debt market has really tightened,” she said, while in Europe and the UK “the debt is definitely there, but is it affordable?”
The funding gap
That's among the most important questions for commercial property markets in 2023. Loans that were provided in 2018 carried an all-in cost of around 3%: now that cost has more than doubled.
Caution among lenders brings other pressures. Higher interest rates plus a reduced willingness to refinance at higher LTVs - which is often necessary amid declines in values - has created a looming shortfall of capital, dubbed "the funding gap". AEW calculations published yesterday suggest that around one in five loans backing commercial real estate in Britain, France and Germany maturing between now and 2025 will be affected, amounting to a funding gap of about 51 billion euros.
To bridge that gap "lenders and borrowers will have to be creative, meaning that either the equity owner puts in additional capital or another lender steps in or a combination of the two," AEW's Hans Vrensen tells Reuters.
Indeed, Lisa Attenborough tells Flora Harley that backing debt funds offering flexible capital will provide a key opportunity for private investors this year. These funds tend to operate in the smaller ticket lending space, with loans ranging from £5 million to £15 million per transaction, though some funds issue loans as large as £200 million. High-net-worth individuals participating will typically seek an internal rate of return of 15%.
Turning a corner
Confidence among US housebuilders has risen for four consecutive months amid signs that borrowers are adjusting to higher mortgage rates.
New home sales rose unexpectedly almost 10% to their highest level in a year during March, according to official figures out yesterday. The month-on-month figures tend to be volatile and analysts suggest that a shortage of existing homes for sale are flattering new homes sales, but there is little doubt that the market has turned a corner.
In other news...
How are housebuilders responding to Help to Buy ending? Anna Ward considers the alternatives.
Elsewhere - New Zealand considers easing high LTV mortgage restrictions (Bloomberg), and finally, TopHat raises £70 million from investors including Persimmon (Times).