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Deep dive into the UK Real Estate Debt Capital Market

A UK Real Estate debt market update, including an outlook on the transition to risk free rates

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Dennis Watson, Head of Real Estate, Barclays Corporate

The UK Real Estate debt market perspective

Jason Constable, Head of Specialist Real Estate set the context for the current state of the debt market, providing us with some well-needed confidence in the real estate market; aided by the fact that many clients have remained incredibly active during this third lockdown, contrary to the significant slowdown in business activity that we saw back in March 2020.

In terms of credit appetite, Jason noted that “we’re hoping for a steady return to a more normalised lending market in the second half of this year. We’re seeing a varied interest for real estate debt exposure, with private equity and blue chip institutional money looking to establish direct lending platforms in order to gain access to what they consider to be attractive risk adjusted returns”. Whilst there remains broad and deep liquidity in the UK real estate market, pricing appears to be holding at the increased levels that we saw at the start of the pandemic, with many lenders seeking a risk premium for new lending – despite the fact that their wholesale lending costs have gradually eased.

The availability of development finance in the debt market has started to increase once more, and whilst risk appetite levels are still somewhat tempered, this may start to ease as market conditions begin to return to normal. There is a strong flow of transactions in the build to rent market which is continuing to grow at pace this year, and Jason also outlined how the various government initiatives such as the Mortgage Guarantee Scheme will continue to provide stimulus to the buying market, all of which is keeping our residential development clients very busy.

Following the recent acquisition of McCarthy and Stone by Lone Star, and now Starwood Funds’ acquisition of RDI REIT, Jason has predicted a further pickup in M&A activity across the industry, with “take private” transactions likely to be a continuing theme.

Outlook on the transition to risk free rates

Following Jason, we were joined by Amy Crick, Head of North, Scotland and Eastern, UK Real Estate, providing details on the transition to risk free rates. To provide some background, regulators from around the globe have been engaging with the financial services industry to transition markets from IBOR based interest calculations to Risk Free Rates. This is being completed under a framework set out by the Financial Stability Board^ (an organisation made up of the world’s largest central banks and regulators) where one of the main areas of focus of these reforms is to widely ensure these benchmarks are credible and the most commonly known benchmark is LIBOR. Libor is referenced by trillions of dollars’ worth of financial products, used for calculating interest payments on bonds, loans and mortgages.

On 5 March, 2021, the Financial Conduct Authority (FCA) made an announcement confirming that all LIBOR settings will cease being representative for Pound Sterling, Swiss Franc, Japanese Yen and the Euro beyond the end of 2021 and US Dollar beyond June 2021. Following this announcement, Bloomberg and ISDA confirmed that the spread component of the ISDA IBOR fall-back rates was fixed on 5 March 2021. The fixed spread adjustment for each LIBOR currency and tenor will be available for us in contractual fall-backs and/or active conversion in the loan and bond markets in accordance with the terms set out by Bloomberg. Amy noted that over the course of this year, Sterling loans will transition to SONIA (the Sterling Overnight Index Average) or, where appropriate, a bank rate alternative product.

In addressing the question, ‘will borrowers pay more interest’, Amy outlined the statements from the FCA:

LIBOR discontinuation should not be used to move customers with continuing contracts to replacement rates that are expected to be higher than what LIBOR would have been, or otherwise introduce inferior terms. We will pay close attention to any case where a contract amendment is made in this way as firms may be failing to meet their obligation to treat customers fairly.

When transitioning their existing contracts, firms receiving LIBOR-linked interest are not expected to give up the difference between LIBOR and SONIA, which results from the term credit risk premium that is built into the LIBOR rate, but not into SONIA.

For more information, please visit:

Transitioning to risk free rates

A sustainability strategy for real estate firms

Lastly, I’d also like to draw attention to our new piece of thought leadership titled How sustainability grows value in the real estate industry, which was launched at the beginning of March. The report presents insights and guidance on the challenges and opportunities of sustainability from some of the early movers in the industry. LGIM Real Assets, Tritax Management, Derwent London and JLL are all pursuing a sustainability agenda and have very kindly shared their experience with us, which I would like to thank them for taking the time to share their insights.

What we are seeing at the moment is both lenders and borrowers are tapping into this market. With more innovation in this area, borrowers have more access to pricing benefits through broader institutional investors who have specific funds focused on ESG. For example, Tritax Big Box REIT has become the first REIT to launch the first UK Sterling green bond and we were delighted to help them with that. The banking market is also growing in green finance with many lenders such as ourselves establishing lending frameworks to introduce green components to traditional real estate lending products such as term loans, revolving credit facilities and now that even extending to bond guarantees and indemnities – ESG is a very strong topic for the rest of 2021 and beyond. To find out more, read our report:

How sustainability grows in value in the real estate industry

Discover how sustainability grows value in the real estate industry with Barclays Corporate clients JLL, LGIM, Derwent London and Tritax Management.

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