November 2023
Dear Reader,
As we head deeper into Autumn, we reflect on a property market that continues to be heavily fractured, predominantly as a consequence of short, sharp, successive interest rate rises. Whilst wider national and international factors are clearly important, the negative inflationary effect on interest rates impacting one’s ability to efficiently use debt as a financial instrument is clearly the most significant one.
The feedback from the banking sector is that the volume of their loan books has reduced as clients that have had the capacity to do so have sought to repay their loans. It represents a challenge to banks to immediately replace those transactions in the current environment. This is especially as many new applications will inevitably be from borrowers that require debt as a consequence of not having sufficient equity, which is historically not the target client profile for the private banks in particular.
This predicament that lenders find themselves in may partly be responsible for why we have not seen the level of distress in the market that we ought to expect. Whilst banks’ loan books are reducing, it is not in their interests to put them under further pressure by enforcing on delinquent debt. Particularly for unregulated business, it is more commercial in the current environment to maintain forbearance, thereby securing receipts of interest payments. Moreover, there is the possibility that having a higher proportion of loans that are holding over would require banks to hold greater levels of capital in relation to the increased risk. Another factor might be to conserve a loan book where the wider implications of downgrading asset values could have the prospect of devastating effects.
The use of cash instead of debt has been mooted as a mitigation of the issue of high interest rates. Whilst the data does suggest that 70% of the properties bought this year in PCL have been bought in cash, it is important to first contextualise. Firstly, a significant number of these transactions have been dollar-denominated buyers specifically looking to make the most of the currency trade, which is not a new phenomenon. Secondly, apartments made up nearly half of the properties worth E5m or more that were sold this year, a market which was already dominated by global cash. Conversely, the Prime house market which is more typically the preserve of those settled in London has tellingly become increasingly price sensitive - these deals are typically more highly leveraged and less underpinned by reserves of cash. This would indicate that, as we believe, that with the potential use of cash comes a necessary consideration of the value of this capital compared to investment purposes, which is increasingly attractive. The fact that there have been 459 fewer transactions over £5m overall in PCL than last year would seem to corroborate this.
Despite the above, there remains significant capital that is ever-bullish on London, as illustrated by the new era of super luxury hospitality with branded residences, with the opening of the £1.4bn War Office on Whitehall and the £1bn Peninsula on Hyde Park Corner, which suggests that London will remain a significant destination of choice for HNW and UHNWs. These will be followed by the new Mandarin Oriental in Mayfair, The Emory sister hotel to Claridge's opposite Hyde Park, the Rosewood conversion of the former US embassy in Grosvenor Square and London's first Six Senses hotel in the second half of 2024. As we work hard to maintain a quiet level of confidence in the challenging economic environment, we are ever reminded that the different guises of the market will demand financial solutions.
W. Coleman & Co has managed financing of c. £300m across a number of real estate asset classes in the last 12 months, the core concentration being prime London residential development.
Best wishes,
Wayne Coleman
