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Forced Sales Likely To Come Now That Even Conservative Loans Can’t Be Refinanced


A leading academic in the field of UK real estate lending has predicted the sudden sharp rise in interest rates set to hit the property market will lead to forced sales, with loans that previously seemed conservative looking increasingly impossible to refinance.

Bayes Senior Research Fellow Nicole Lux said a spike in interest rates now being predicted by financial markets and caused by the sharp decline of the pound and the value of UK government bonds this week would “inevitably lead to forced sales”.

“The five-year [Sterling Overnight Indexed Average or Sonia] swap rate shows us that debt affordability is already in sharp decline, meaning fewer and fewer people are able to meet repayments,” Lux said. “At present rates, a mortgage of 60% loan-to-value requires higher interest payments than disposable income available.”

Explaining the workings behind her thinking to Bisnow, Lux said that prime office yields in London and bigger UK cities are about 4.5%. The average margin on a 60% LTV loan on such a property in the UK would be about 2% on top of the base Sonia interest rate now being factored in by markets of about 5%.

That means the interest paid on a 60% loan when it comes up for refinancing in the next few years will be 7%; if the property’s yield is 4.5%, that would be higher than the income being produced by the property. 

In order to refinance loans underwritten between 2017 and 2019 and coming due between 2022 and 2024, borrowers will have to put up significant amounts of new equity or face repossession because income does not cover interest by a large enough amount. 

“All this will inevitably lead to forced sales amongst commercial and residential property owners, which will play strongly into the hands of capital-rich investors who can pick up a bargain,” Lux said.

In a research paper this month, AEW predicted that £11.3B would be needed to plug the refinancing gap in UK commercial property, although that research was produced before this week’s turmoil, which is expected to push interest rates higher than previously predicted.