In the last episode of this four-part series analysing some of the key challenges faced by emerging property developers and how lenders can help solve those challenges, Blend Network CEO Yann Murciano discusses the challenges of operating in a rising interest rates environment, and how to mitigate the uncertainty associated with such an environment.
Decades of ‘cheap money’ are behind us
The highest UK inflation in over 30 years and the Bank of England’s warning that inflation could rise above 10% or go even higher signals the end of ultra-cheap money. In order to fight the rising inflation, the Bank of England raised interest rates to 1% in early-May, the highest rate in 13 years and its fourth successive increase. Yet it is widely expected that the current rate cycle hike is far from over. Adam Posen, who served on the BoE’s Monetary Policy Committee (MPC) from 2009 to 2012, recently told the parliament’s Treasury Committee that in his view short-term interest rates will have to go up at least 250 to 300 basis points from here. That would mean an interest rate of 3.5% to 4% – well above the 2.5% peak priced in by financial markets for June 2023. The interest rate increase has already brough borrowing costs to levels unseen since the recession caused by the Global Financial Crisis in 2008.
What does that mean for property developers?
“If rates go up, will my development finance costs go up?” has been the question on virtually every property developer’s lips over the past few months. The answer is yes and no, depending on whether developers are using fixed rate development finance facilities or facilities with a direct link to the Bank of England base rate. If they are using variable rates with a direct link to the Bank of England rates, then invariably the current rate hike cycle means that their pay rates or total cost of their debt have already increased in line with the higher base rates. However, if they are using fixed rates, then the cost of their debt remains unchanged throughout the loan cycle, therefor providing them with increased certainty. Fixed rates have traditionally been more popular than variable rates with developers because most developers prefer the security of a fixed rate when interest rates are expected to rise.
How can developers protect against rising rates?
With the Bank of England warning that inflation could hit 10% by the end of the year and the bank determined to do whatever it can to reign on the soaring prices, many developers have raced to the certainty of fixed rates. However, the issue is that depending on their source of capital, not all lenders are able to offer fixed rate development finance facilities because a rate hike may also mean that the lender’s source of capital becomes more expensive. At Blend, we only offer fixed rate development finance and bridging loan facilities. Our flexible source of funding means we can offer fixed rates. Furthermore, we believe that fixed rate loans are best suited to the requirements of property developers who already have enough on their plate with issues such as the rising cost of materials and skills shortages, and who don’t need more added sources of uncertainty.
If you are a property developer or a broker and have a project that you are looking to get funding for, please contact us on email@example.com or call us on 020 3409 3000.
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