Leading Indicators | Are investors positioning for upcoming refinancing events?
Discover key economic and financial metrics, and what to look out for in the week ahead.
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NET LENDING TO UK CRE RISES
Net lending to UK commercial real estate totalled £297m in July, the fifth consecutive month in which it was positive. The total was tempered by net lending to developments, which fell to a seven-month low of £-135m in July. Therefore, net lending to UK CRE was supported by lending to standing property, totalling £432m in July.
We expect refinancing to be a key feature of the market over the coming months. In 2018, c.£50bn of CRE debt was originated in the UK. Assuming a five-year loan term, much of this debt will be starting to approach maturity.
Separately, Q2 2023 saw the lowest number of UK CRE standing property transactions in over 10 years, with the number of transactions -37% below the 10-year Q2 long-term average. This suggests that firms are borrowing for reasons other than purchasing, including to prepare for upcoming refinancing events.
FROM TAIWAN TO TAMWORTH: POLITICS HEATING UP
Political tensions are on the rise. Over the last week alone, we’ve seen a coup in Gabon, a rise in military tensions surrounding Taiwan, and Ukraine increasing its drone presence in Russia. Meanwhile, in the US and UK, the run-up to the 2024 elections is underway. In the UK, yesterday saw a Labour Shadow Cabinet reshuffle; meanwhile, the Conservative party could be facing two by-elections this autumn for the Mid-Bedfordshire and Tamworth seats. Betting odds currently suggest a 67% likelihood of a Labour majority following the general election next year, down from 69% in July. Meanwhile, the probability of a no-majority outcome increased from 8% in July to 27% currently.
If Labour were to form a government, the impact on UK CRE might be relatively positive, at least based on previous performance. Between 1997 and 2010, UK CRE achieved inflation-adjusted returns of +6.7% p.a. under the two Labour governments. The 2010 – 2015 coalition government was the only period where UK CRE outperformed this (+8.6% p.a.). However, the context of a post-GFC economic upswing cannot be ignored.
HOW GENERATIVE AI WILL SUPPORT ESG IN REAL ESTATE
Flora Harley, Head of ESG Research, argues that Generative AI could play a particularly pertinent role in supporting real estate’s ESG ambitions. For example, by attaching a device to the building management system, AI can analyse occupancy, energy consumption, waste and water usage data to provide insight. This could optimise energy consumption by identifying inefficiencies and suggesting energy-saving measures to reduce costs, waste and emissions.
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