KKR cautions on UK consumer finance risks
KKR is cautious on UK consumer risk, citing the ongoing impact of Brexit as a key risk factor.
The investment manager said that higher rates and higher inflation are having a much larger impact on the UK than any other market, and noted that it intends to be more selective when it comes to UK consumer debt in the year ahead.
“We are more selective and cautious on UK consumer risk than any of the other markets in which we invest,” said Varun Khanna, co-head of asset-based finance at KKR.
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“You have the higher rates and higher inflation that are impacting every consumer in every part of the globe, plus the added impact of Brexit.
“In the UK mortgage market, rates are only fixed for the first two to five years, and then they flip to floating rate. In the last 12-18 months, people who have moved from fixed to floating rates have seen debt service costs increase substantially. That trend is going to continue.”
According to product sales data and bank calculations from the Financial Conduct Authority, higher mortgage rates will persist until the end of 2026.
The Bank of England has predicted that for the typical owner-occupier mortgage holder rolling off a fixed rate between the second quarter of 2023 and the end of 2026, their monthly mortgage repayments are projected to increase by around £240, or around 39 per cent. This will heap further pressure on UK households.
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Consumer and mortgage finance is the largest part of KKR’s asset-based finance portfolio. Khanna said that in the US, leasing and single-family rental properties have been very successful themes over the past several years, but the firm has pivoted away from these investments in favour of better opportunities in US regional bank portfolios, for example.
“Longer term, we remain constructive on the leasing and housing sectors and will look to lean back in as market conditions evolve,” he said.
“In the broader consumer space, we’re skewing to prime borrowers, who are more insulated from the effects of inflation, and taking more collateralized or secured consumer risk to get the extra layer of security from the underlying asset.
“That is why we are focused on mortgages and auto loans, rather than credit card receivables and unsecured loans.”
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