Both the economy and the commercial mortgage market appear to have reached a level where lenders have some confidence that their cost of borrowing will not increase further. In fact, the swaps markets are pricing in rate cuts in 2024, which begs the question: Are commercial mortgages turning a corner into 2024?
Economic Stability
Despite forecast concerns of a recession, further deterioration of the economy hasn\’t materialised, and therefore, confidence is restored in the outlook for trading businesses in many sectors. Providing relief for the end users of commercial property on which commercial mortgages are based, whether they\’re owners or tenants.
Due to both domestic economic factors and global macro factors, the commercial mortgage market experienced 22 months of frequently increasing rates and significantly reduced lender appetite.
A caveat is that this positive sentiment is subject to change in reaction to macro global events, which includes a building concern around the effects on global economies of the supply chain delays caused by all the major shipping and freight carriers avoiding the Red Sea and a broadening of the Middle East conflict.
The picture changes daily, and all market participants, including lenders, will be watching it closely.
Mitigating risk
The last three years have taught us all a lot about \’Just In Time\’ supply chains, the effects of price inflation on delays and increased costs in the supply chain, and exactly how inflation translates into the interest rate cycle.
The picture changes daily, and all market participants, including lenders, will be watching it closely.
As we enter 2024, with lender confidence in market conditions higher than it has been since 2021, the opportunity is that lenders will want to increase market share – and where multiple lenders all have this target, it can result in lower rates and product fees for the client.
Other factors that have hindered clients\’ securing a commercial mortgage may improve, such as a lower Debt Coverage Ratio (DCR), the commercial mortgage equivalent of stress testing repayments.
Investment Strategies
There\’s evidence of significant growth in more diversified investment strategies, where maximising yields & tax efficiency is key to investors. Vanilla residential Buy To Let has yet to stack up on an affordability or margin basis, so many landlords are exploring other investment strategies.
Commercial and Semi-Commercial properties can offer better yields, be more tax efficient, and offer landlords less friction with their tenant profile.
Semi-commercial properties offer a diversified investment in a single property!
International Investors are also looking very favourably at UK Real Estate.
Commercial and Residential properties are attracting investment from high and ultra-high-net-worth international clients, and returns can be enhanced when you add a weaker British Pound on the Foreign Exchange markets.
And if it\’s a good enough outlook for high and ultra-high-net-worth investors to be in the market – then that\’s a good sign for the rest of us, mere mortals.
Mark Grant, Managing Director – UK, Fiducia Commercial Network
February 2024.
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