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By The End Of This Year, It Could Be Profitable To Use Debt To Buy Property Again


It will be easier for buyers to use debt to purchase real estate in the UK by the end of the year, according to new research from one of the world’s biggest fund managers, giving a boost to the investment market. 

Sharp rises in interest rates since summer 2022 have meant borrowing costs were higher than property yields in the UK and beyond. Interest paid out on the average loan has been higher than the income produced by the average property. That made it unprofitable for borrowers to buy real estate, keeping debt-backed investors out of the market.

But research from AEW Capital Management predicts that by the fourth quarter, the cost of borrowing will have come down in the UK, with rates starting to drop and inflation easing. Property yields will also rise, making it attractive for buyers to use debt again. 

AEW predicted that by the end of 2024, UK borrowing costs will be down to about 5%, with average prime yields at 6.2%. In the eurozone, debt will become accretive on the average deal this quarter, AEW said. 

That will be good for buyers of new assets, but it won’t be enough to help all of the current borrowers that need to refinance existing deals over the next few years, AEW said. A 5% borrowing cost will still be far higher than the sub-3% cost of debt seen before December 2021. 

Combined with a fall in asset values, that is expected to create a debt funding gap of €90B (£77B) in Europe. The debt funding gap is the difference between the amount of debt that needs refinancing and the amount of debt available to refinance those loans. 

The biggest debt funding gap is in the office market, followed by retail assets. 

AEW estimated that 7.5% of European loans underwritten between 2018 and 2021 will default when they mature, with lenders facing losses of about 2.5% on those loans, or about €14.5B. Unlike during the Global Financial Crisis, banks will be able to absorb these losses because they are now forced by regulators to put aside more capital to guard against potential losses, AEW said.

Related Topics: AEW, UK borrowing costs