By Daniel Austin, CEO and co-founder at ASK Partners
Whilst buy-to-let investors are benefitting from double digit increases in rents across the UK, the cost of higher interest rates and the increased tax burden, means we’d expect many private investors continue to exit the market. In addition, we have seen the closure of many open and closed-ended property funds which have suffered from the issue of a liquidity mismatch. This will strengthen the appeal of investment in real estate debt which can give investors the chance to build a varied portfolio and the opportunity to buy in and out of investments when it suits.
Which sectors will debt providers be backing?
The UK continues to face a shortage of housing infrastructure, which will continue to support property prices, despite the higher costs of borrowing. Widespread predictions of a major slump in residential prices linked to higher borrowing rates seem to have been overstated, and with many private investors continuing to exit the market we will see a further reduction in the supply of rental stock which will continue to fuel residential rent rises, currently running at a year on-year increase of approximately 12%. There is both the opportunity and liquidity within the Build to Rent (BTR), Private Rented (PRS), Purpose-Built Student Accommodation (PBSA), and Co-Living spaces which will continue to see growth from a rise in demand that build rates can’t match.
We are able to serve the needs of developers operating in those sectors with flexible loan terms such as no interest coverage ratio, which has been a difficult restriction for those with built stock looking to exit or refinance.
We’d expect that the prime London market will be insulated from price drops given the city’s economic strength and appeal to international as well as wealthy UK buyers, although political uncertainty in an election year and higher taxes will weigh on values.
We would also expect life sciences to continue to see a rise in investment. It remains a nascent sector in the UK but its appeal is broadening based on ageing demographics, increased healthcare spending, the advances of robotics and AI and an R&D revolution which is fuelling lab space demand from numerous small start-ups rather than big pharma.
Quality and location will be more important than sector
The low interest rate environment encouraged property investment purely for yield on cash. We think it is now more crucial to know the sector and back high-quality schemes in the right location. Location and quality have in fact become more important than yield on debt or cost and it is more important than ever to back the right sponsors with enough long-term capital to see them through the cycle. As prices bottom out, we will see opportunistic acquisitions for prime locations.
At ASK we already have a pipeline of loans which will close in Q1 2024 and they cover a variety of sectors. We expect we will see more residential opportunities than others but there are still strong prospects in sectors such as offices, retail, logistics and leisure where requirements are evolving and those able to address market demand will have a credible offering.
2024 brings challenges and opportunities
Whilst the lead up to the Autumn election will perhaps hinder progress, we are likely to see a boost in productivity alongside a fall in interest rates. It is hoped that any new government can address issues at a local planning level to boost construction and help us build our way out of the downturn. Labour’s big plans for social housing could help address this issue.
As a debt provider we will be looking to back the best sites in the best locations with well capitalised sponsors who understand their product. Using this formula, we can support developers’ strategies by taking a flexible approach to our underwriting, and continue to provide opportunities for the rising number of private individuals who are choosing to invest in property debt.
