Most lenders think the UK market will see further price falls in the coming six months – even if transactional activity picks up.
In a survey for Savills’ 35th ‘Financing Property’ presentation launched in London today to an audience of real estate lenders, a higher proportion of respondents believe the market will see a greater negative correction than a positive one over the rest of this year.
This comes after the UK has already seen the fastest correction in recent times, despite there being very little transactional activity evidence due to the slump in deal volume. This has even led to some jibes that for once valuers are leading the market rather than following it, as has been the complaint in the past.
In the UK according to MSCI, values have collapsed by more than 20% in the eight months to date, though the rate is slowing. After the global financial crisis, values took 14 months to fall this far.
Nick Harris, Savills head of UK and Cross Border Valuation who led the presentation, said it was interesting to note the wide divergence of views from lenders, about the same real estate sectors. Even for living and prime logistics, which were the only sectors where the average of all the views was that prices have now stabilised, the range was 20% either way for residential and 15% either way for logistics.
Harris said: ‘Typically, we would expect market views to be broadly aligned, but the disparity underlines some of the fundamental challenges around the future outlook for pricing…For the market to progress, this dislocation of expectation needs to narrow.’
Savills, like other big agency firms, says it expects investment transaction volumes to pick up in H2 2023, a belief based not necessarily on views on values converging but partly on pipeline and partly on the expectation that investors will not put off buying/selling decisions much longer.
But Harris cautioned that this doesn’t necessarily imply that pricing will improve and values start to recover, because the evidence from more deals might indicate further value falls.
The presentation also highlights another challenge caused by this volatility: refinancing outcomes, particularly for the £38 bn debt secured on UK property due to be refinanced in 2024 – a relatively high volume.
Harris said: This activity is being undertaken against the backdrop of rising debt costs, falling capital values and the potential risk of additional capital expenditure associated with ESG. As a result, capital structures are becoming stretched and where these cannot be cured, we may see an increase in sales, consensual or otherwise as lenders seek to recover their debt.
‘Despite this, many lenders are looking to increase their market share. There are undoubtedly opportunities for lenders and this is generating some competition for the absolute best in class assets with strong sponsors.’