2020 Will Be A Hairy Time To Be A Borrower But A Great Time To Run A Debt Fund
In two years it is going to be harder to refinance debt, making 2020 a difficult time to be a borrower. But that is going to make it a great time to be an alternative lender.
At its 30th annual Financing Property presentation on 5 June, Savills pointed to a confluence of an increase in loan maturities and potentially falling values which will make 2020 a tough year for those who need to refinance debt.
Savills cited research from the CASS Lending Survey, which showed that 73% of all outstanding debt is due for repayment in the next five years, with loan maturities set to peak in 2020 due to the large volume of loans drawn in 2015.
This could cause some borrowers to seek alternative sources of finance, especially if values fall in the interim. With yields already low it will be challenging to replicate existing levels of leverage if sustainable interest cover ratios are to be maintained. This will inevitably lead to lower loan to values, which could prompt some stress at the point of refinancing.
But with every challenge comes an opportunity. According to Savills, while many banks either can’t or won’t increase LTVs due to regulatory restrictions and prudence, alternative lenders like debt funds could be attracted to such borrowers as they look to offer increased leverage at higher margins.
The next three to four years could therefore offer tremendous opportunities for alternative lenders and will further hasten the move of property debt from traditional banks to the alternative sector, where Savills has identified approximately 100 lenders. In 2008 the alternative sector accounted for about 5% of lending, and by 2017 this had increased to 25%, and this is deemed a conservative estimate.
Rising interest rates could also cause some areas of stress in the debt market.
“The rising cost of money won’t necessarily cause notable value shifts or worry the lending industry so long as the overall cost of finance remains relatively low, as is currently anticipated,” Savills Valuation Director Nick Hume said. “However, in the face of pressure on interest cover ratios and debt yields, it could lead some lenders to offer lower leverage, which could benefit alternative lenders who are prepared to go higher up the risk curve to generate better returns. This is particularly relevant to refinancing, as a gentle decline in values will create pockets of stress, as is already visible in certain areas of the retail sector.”