Property refinancing gap heaps pressure on borrowers
The property refinancing gap is forcing many borrowers to turn to expensive debt relief, according to a new analysis from Federated Hermes.
In a note to investors, Vincent Nobel, the investment manager’s head of asset based lending, said that high interest rates have put pressure on borrowers to seek temporary refinancing and loan extensions at higher rates.
This has already led to a slowdown in transaction activity, with recent transaction date for UK real estate showing another record low in the first quarter of 2024, beating the previous record low set in the first quarter of 2023.
“For many investors the focus remains on their existing assets, including the refinancing needs when loans come up to maturity,” said Nobel.
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“A gap remains between the existing debt levels and where new lenders are willing to lend. In most cases that gap needs to be filled with equity which is expensive and, in some, cases simply not possible.
“Where possible loan extensions with heavy amortisation may provide temporary relief.”
Nobel added that for those seeking subordinated debt to fill these gaps, the cost of debt may come as a shock.
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“Ending up with expensive mezzanine financing on top of more expensive senior debt at a lower loan amount is an unwelcome – though not entirely unpredictable – surprise for many investors,” he said.
“In that context, the search for new bargains may have to wait until existing problems are addressed.”
The UK’s Bank of England has held the base rate at 5.25 per cent since August 2023, despite widespread speculation of an imminent rate cut.
Central banks in the UK, US and Europe have all indicated that rate cuts will take place at some point this year.
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