Intelligent Investment
How will the use of debt finance change in 2024?
February 19, 2024 4 Minute Read
Our 2024 Investor Intentions Survey suggests that sentiment is improving in real estate markets, with UK real estate investors intending to increase activity this year. One factor behind this shift is improved expectations for UK inflation and interest rates. While discussion last year was initially focused on interest rate rises, debate has since turned to the prospect of interest rate cuts and when these might occur. This has been accompanied by a decline in long-term bond yields and swap rates. For example, UK five-year swap rates fell from c. 5% in mid-2023 to c. 3.5% by the end of December 2023.
Nonetheless, investors that use leverage will still face challenges in 2024. While a rise in property investment yields and a reduction in debt costs will begin to make debt more accretive for new acquisitions, many investors will need to consider how to refinance existing loans that were originated in different market conditions. Although recent falls in UK interest rates are welcome, they remain at higher levels than three to five years ago. In addition, capital values for commercial real estate assets have declined over the last 18 months.
Therefore, it is not surprising that many UK real estate investors plan to maintain or reduce their use of leverage in 2024. Falling asset values have led to an increase in LTV ratios for existing loans, which may require some investors to manage the use of leverage carefully. Higher interest payments on floating rate loans or for potential new loans are another factor that might deter investors from increasing the amount of leverage they use. Figure 1 shows that 39% of UK respondents to our survey planned to reduce the use of leverage, while only 8% thought they would use more debt than in 2023.
Figure 1: How UK investors expect their use of debt financing to change in 2024 when compared with 2023
Source: European Investor Intentions Survey, CBRE Research, January 2024
Despite this, we anticipate that there will be continued demand for real estate debt as borrowers seek to refinance loans that are due to mature in 2024. CBRE has estimated that there could be a debt funding gap as large as £35bn in relation to UK real estate based on capital values and interest rates as they stood in H2 2023. While most of this figure could be reduced through a recovery in values and a reduction in interest rates over the next few years, 2024 could see pressures and opportunities as borrowers seek to address funding gaps via loan extensions, new sources of debt, additional equity or by undertaking asset disposals.
Among the survey respondents that use leverage, a majority noted that increased interest expenses on new loans (selected by 70%) and/or less favourable loan terms (selected by 67%) were the main challenges they faced when sourcing real estate debt. Tighter loan approval processes and the effect of lower asset values were also concerns for some respondents, but the fact that these were not the strongest concerns could reflect that use of leverage in the UK prior to the recent downturn was generally more conservative than in previous market cycles.
Figure 2: Major challenges for UK investors when sourcing debt for investment or refinancing
Source: European Investor Intentions Survey, CBRE Research, January 2024
The full report for 2024 that is based on responses from investors located throughout Europe can be found here.
