Real estate finance market: reducing risks

 


After an initial pause, most lenders have resumed business. Nevertheless, they are clearly in the process of reducing their risks, focusing on more conservative financing and lending structures. The vast majority are no longer financing hotels and leisure properties. The large banks in particular are devoting a lot of time to identifying and managing risks in their existing portfolios, leaving less capacity available for regular lending. This is delaying the provision of loans. We do not expect the current early recovery of the finance market to have any chance of significant continuation until after the summer.

Deals falling through

Most finance deals from before Covid-19 have been successfully finalised, but many saw last-minute changes in terms of cost price and structure and some fell through at the very last minute. The latter occurred mainly in sectors particularly hard hit at the moment and in the case of development projects and projects in which there is now less certainty about current and future rental incomes.

Finance more expensive and uncertain

After absorbing the first shock, many lenders started to consider new propositions. Despite this, the second quarter will probably prove even more difficult and involve a lot of uncertainty. This is making finance deals more expensive. For lower-risk financing, this is currently limited to between 25 and 60 basis points, but, in the case of higher risks, can sometimes result in a doubling in the interest rate. On the more opportunistic side of the market, spreads over the reference rate between providers can vary extremely widely. Because lenders have also become more critical, there has been a significant reduction in supply, making the realisation of financing arrangements unpredictable. This is compounded by the fact that many lenders have concerns about valuations in the current market. The fact that the major surveyors are including a material uncertainty clause in their valuation reports is also adding to their uncertainty with regard to the rental and investment markets

 

Positive trend expected

Many lenders are hoping that a phasing out of lockdown toward the end of the year will provide the space they need to expand their supply. However, this depends completely on the (expected) economic recovery and the long-term impact on the real estate market. On a positive note, many borrowers currently facing problems paying interest and redeeming their outstanding loans are being given space by their lenders to see out the summer.

 


We do not expect the current early recovery of the financing market to have any chance of significant continuation until after the summer.


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