IPSX’s Rupert Snuggs on where liquidity will come from

Knight Frank’s partner in charge of debt advisory Lisa Attenborough told guests at a recent breakfast meeting that, in 2023, investors need to find £13bn to refinance debt originally secured in 2018. LandSec is set to pay £135m to fund sustainability improvements.

Attenborough also gave details of 80-plus non-bank lenders that may step in to provide mezzanine debt on top of original senior loans. The challenge for asset owners is that this debt is expensive and they should look at wider options.

As a former banker at Rothschild, RBS and HSBC, I have been here before, and the good news is that the £13bn the sector needs to find today is dwarfed by the £80bn it needed to refinance its debt after the global financial crisis.

For large, listed property owners, increased interest rates are a shock. Maintaining loan-to-value levels between 15% and 35% will help them stay well clear of covenant levels even with the steep fall in values. It is unlikely that, this time round, right’s issues will be required.

They will also retain the ability to raise debt from traditional sources (banks and capital markets), given their long track record or financial prudence, high-quality tenants, consistent rent collection and opportunistic asset sales.

The asset owners that are finding the going much tougher are financial engineers who entered the property market simply to play the arbitrage between the rental yield from their properties and the low cost of borrowing over the past 13 years.

These owners are now in the unfortunate situation of that equation having flipped, with the rental yield now in general 200 basis points below the interest rate at which they will need to refinance.

They often do not have the track record or asset management skills to negotiate or trade their way out of this dilemma, particularly in secondary or tertiary locations seeing the steepest falls in value.

These owners are also faced with the dilemma of upgrading their properties to comply with Energy Performance Certificate ratings, as it will be illegal to occupy a building with a rating below E from April, C by 2027 and B by 2030.

This will only compound these owners’ problems, with potential loss of the rental income through which they are striving to manage their debt.

The good news about downturns is that they lead to innovative solutions and there are new answers to these problems. There is a new and ready pool of investment capital still seeking to invest in real estate, with equities and crypto having proved to be highly volatile in the last 12 months. Property remains relatively stable, despite falls in valuation, compared to other alternative asset classes.

Investors are keen for exposure to real estate and, by investing in transparent, listed real estate assets, they can achieve this.

Owners, meanwhile, could meet their environmental obligations by listing on IPSX and offering 10% of shares to external investors. The owner of a £100m property could raise £10m to fund the refurbishment.

The investor, meanwhile, would have 10% of an asset that will perform well – as well-managed real estate is generally proven to do – over the medium to long term.

The same owner of that £100m building could list it and offer 20% to external shareholders and use that new equity to refinance debt falling due this year, again offering investors stable long-term returns, plus the ability to trade their listed shares whenever they wish.

The worst situation for any owner faced with refinancing or refurbishment costs is to be a forced seller. With the UK economy stabilising after the nightmare of Trussonomics, now is the time to find innovative answers to the pressing problems facing real estate in 2023.

Rupert Snuggs is head of origination at IPSX