What’s Happening To Interest Rates in Commercial Property?
I spend much of my time negotiating finance on behalf of property investors and developers.
That means negotiating long term investment loans as well as development finance, exit finance and short-term bridging loans.
And as a broker, I’m noticing more and more new entrants in to this specific sector of the lending marketplace.
At the moment, hardly a week goes by without another new lender entering the fray, offering development finance and bridging loans to property clients.
This is of course great news for borrowers because more and more lenders are chasing their business. And for us as brokers, we’re also spoilt for choice.
Lenders are offering an increasingly diverse range of products, but not only that, they are doing so at increasingly competitive prices.
The increased competition particularly within development finance and bridging loans has put a downward pressure on interest rates.
For instance, four or five years ago when I was arranging bridging loans for clients, I was typically getting deals from lenders in the region of 1% – 1.25% per month. Now those same deals are being done at rates in the region of 0.75% – 0.85% per month
Why is this the case?
I would suggest it is the basic economic principle of supply and demand. The markets are awash with money. There is a lot of liquidity globally from such as pension funds, private equity houses and the peer-to-peer sector.
The result is that more and more money is coming into the UK lending market, particularly the bridging sector.
Funders see bridging in the UK as an attractive proposition for several reasons. Firstly, they are lending against property thus it is considered secure. In addition, the rates of return are good compared with the alternatives and because bridging loans have an average term of 3-4 months, this means the money is “churned” more quickly than with long term loans which also increases returns for investors.
So good liquidity in the markets and new entrants into the sector can only mean one thing – a downward trend on interest rates.
In addition, lenders must also look at other ways of differentiating themselves from the competition. Whether that be loan to value, speed of turnaround or the types of property they will lend on.
For instance, I came across a new lender in the sector who is offering 80% loan to value and I have seen that since before the financial crisis of 2008.
Of course, established lenders don’t want to lose market share, so they have no alternative but to reduce interest rates to ensure they remain competitive.
And of course, Fintech is playing its part by increasing efficiency, reducing costs and therefore being able to offer competitively priced products.
So, what does all this mean.
Well firstly I don’t see a change in the lending market any time soon. I think new entrants will continue to come into the market offering increasingly competitive deals.
My only note of caution would be that it was like this back in 2005, 2006 and 2007 – with lenders reducing rates and offering increasingly competitive pricing to maintain market share.
And of course, we all know what happened in 2008….
That said, if you’re a property investor or developer needing to borrow to fund property deals, now is a great time to be in business.
Borrowers are spoilt for choice when it comes to deciding which lender to go with and they can borrow at rates that simply weren’t available only a few years ago.
The party will inevitably end. Who knows when, but credit markets may tighten, property prices may drop. In which case rates will go up and loan to value levels will go down.
But for now, if you are a property professional looking for funds, there has arguably never been a better time to borrow money. All you have to do is find the right deal……