Could tighter credit conditions be a boon for commercial landlords?
Making sense of the latest trends in property and economics from around the globe.
6 minutes to read
The outlook for interest rates
The outlook for UK interest rates has shifted after measures of inflation and wage growth came in above consensus - see Wednesday's note. Markets have priced in a 25bps rise in the base rate on May 11th.
The large investment banks have also published new forecasts. Morgan Stanley analysts said they now expect a 25bps hike at the next meeting, and see "clear risks of a June move too", according to the Reuters round up. Bank of America, BNP Paribas and RBC Capital Markets all now expect a hike in May, from a previous call of no change.
Mortgage rates have been stable for several weeks and some borrowers can still secure sub 4% five-year fixed rate deals. That stability will come under pressure during the weeks ahead as rate hikes draw nearer, though there is still considerable competition for business among lenders, particularly in the higher value, lower loan-to-value markets, which will exert some counter-pressure, according to colleagues at Knight Frank Finance. You can subscribe to their quarterly updates on the mortgage market here.
The economy has weathered higher interest rates pretty well so far. We talked on Wednesday about Deloitte's latest survey of CFOs, which registered the largest increase in confidence since the rollout of the Covid-19 vaccines. The consumer, too, is now better. GfK’s consumer confidence index, out this morning, rose six points to minus 30 this month, the highest reading since the beginning of the war in Ukraine.
“There’s a sudden flowering of optimism with big improvements across the board,” said GfK's client strategy director Joe Staton.
Dreams of a pivot
Are we all guilty of wishful thinking when it comes to falling interest rates? US Federal Reserve Chair Jerome Powell has for the best part of a year sought to walk back Wall Street's expectations that we'll see cuts this year, insisting that loosening won't begin until the committee is "confident" that inflation is moving back to its 2% target.
JP Morgan's Jamie Dimon and Blackrock's Larry Fink are part of a roster of influential voices that believe interest rates are going to remain higher than markets are expecting. Traders are currently pricing in a hike to a range of 5.00% - 5.25% at the next meeting, before easing to at least 4.50% - 4.75% by the year end.
Blackstone posted its annual results yesterday and its president Jonathan Gray said that he also believes that the market is too optimistic. “The Fed is likely to pause or maybe go 25 basis points higher from here, but I think they’re unlikely to pivot as quickly as the market is expecting,” he told the Financial Times.
A prolonged period of higher interest rates will be bad news for the housing market, which has shown signs of recovering. Shares in homebuilders climbed to their highest level since January 2022 after the largest US homebuilder D.R. Horton reported better-than-expected results this week. However, mortgage rates are beginning to creep up again - the average 30-year rate hit 6.39% this week, according to Freddie Mac data published yesterday. Unless that eases to the mid five percent range, "demand will only modestly recover", the group said.
Credit and supply
We've talked a lot recently about the potential for tighter credit conditions in the wake of the mini-banking crisis that resulted in the collapse of Credit Suisse.
Our own head of debt advisory Lisa Attenborough appeared on our Intelligence Talks podcast earlier this month. She took the view that the crisis would be an issue of affordability, rather than availability, as lenders struggled to assess how to price risk. Blackstone's Mr Gray confirmed in an interview with Bloomberg TV that lending to the construction sector is getting tighter, without specifying if it was a global or strictly US issue. He takes the view that landlords will benefit over the long-term: -
“The one benefit to existing owners is that construction lending is getting tighter. I think we will see less new supply and long-term that’s a positive...fundamentals around supply and demand are what drives value. That’s why I have confidence," he said.
Indeed, though values are under pressure, many global cities are facing a shortage of supply of the best commercial space over the long run, whether that's prime offices, logistics or lab space. There was 15.42m sq ft of prime office space under construction in London as of the end of 2022, for example. Of that, 11.m sq ft is being built speculatively. Extending trend levels of demand for new and refurbished buildings implies a shortfall of almost 11m sq ft across the capital by 2026.
Offsetting
This week's edition of Intelligence Talks comprises a deep dive into one of the UK's hottest property sectors. No, not life sciences, data centres or the living sectors this time, but farmland.
Values are up 11% in the most recent twelve months. A shortage of supply combined with an influx of new buyers is supporting values, offsetting increases in the cost of borrowing, falling agricultural support payments and sliding grain prices.
New buyers range from large funds seeking to offset their environmental impacts elsewhere to private investors that want to leave their mark on the land by rewilding - Knight Frank's head of rural research Andrew Shirley's journey to Alladale Wilderness Reserve in Scotland provided some unique insights into the latter. These are fairly recent developments that come with all sorts of ethical questions. Is it even right to put a value on nature as an offset, or should we just clamp down on high emitters? How can we prove that various offsetting schemes do provide additional benefits to the environment? And how is all this impacting the land market?
Andrew Shirley, Knight Frank's head of rural research and Isabel Swift, a partner in our rural consultancy team, are on hand to provide answers. The episode will be up shortly. Listen here, or wherever you get your podcasts.
In other news...
Chris Druce publishes a new monthly round up of the key housing market data, and sees what lessons we can take from house price performance along the London Marathon route. Good luck if you're participating this weekend.
Elsewhere - Landlords gain right to sue over rip-off insurance policies (Telegraph), FCA sets out multi-occupancy leasehold insurance reforms (The Financial Conduct Authority), rising costs force UK firms to compromise on sustainability (Reuters), cross-border remote working could boost London financial centre (Reuters), UK rental housing less affordable than in 2019 (Reuters), retrofit roadblocks: the struggle to make England’s older homes energy efficient (FT), and finally, Michael Gove urges investors to pressure cladding companies over housing repair costs (FT).