At the end of 2022 and into January 2023, the tech sector hit headlines when a number of the largest American tech companies (Meta, Alphabet, Microsoft and Amazon) announced they were laying off significant numbers of employees. Investors generally reacted positively to announcements about leaner workforces on the basis that this should translate to lower operating costs, and provide the possibility for these companies to invest in other projects – such as Microsoft’s reported interest in investing in OpenAI – a potential $10 billion deal.
While lenders may offer lower loan-to-value ratios for securities-backed loans in the current market, they are still keen to do business. January saw plenty of demand for loans secured against tech stocks, despite the challenges for the industry, showcasing confidence in the sector and future growth.
Given the current market outlook and volatility, we thought that January might see requests for smaller securities-backed loans, but contrary to our expectations, we saw more interest in very large (and viable) securities-backed lending deals.
At the end of January, the International Monetary Fund announced its forecast that the UK would be the only leading country to experience a recession this year, with output projected to contract by 0.5%. While this makes for a challenging environment, we believe many companies are hoping – and have prepared for – a short and relatively light contraction which may be followed by opportunities for growth later in the year and into 2024.
Corporate lending rates are affected by the Bank of England’s (BoE) base rate increases on February 2nd, and corporate loans are becoming comparatively more expensive as a result. However, for the companies taking out finance in the current environment, the cost of borrowing often remains negligible in relation to the opportunities it offers, and we expect that despite the base rate increase, this will remain the case into February.
We saw healthy demand for corporate lending last month. In particular, we continued to see solid companies in good financial positions look to corporate finance as a way to optimise cash-flow management against a challenging and uncertain economic backdrop. This translated to more enquiries about invoice finance and corporate and VAT tax loans, as we expected. Demand also remains for corporate finance to buy existing companies and invest in expansion, showing there is optimism from investors and business owners in the opportunities in the potential for growth and good return on investment.
Lenders raised mortgage rates considerably at the tail end of 2022, and many priced their products in anticipation of the BoE base rate increase announced on February 2nd. While base rates increases always impact the cost of certain mortgage products, there won’t necessarily be a universal increase in rates across the market. In January there was a slight softening of pricing in some areas as lenders worked through refinancing volume and affordability analysis and there was the promise of more stability (and less government spending) under Rishi Sunak’s premiership.
Despite the BoE base rate increase last week, we expect this softening to continue over the next few months as lenders look to capture new business, especially if property transaction volumes drop and competition for borrowers becomes fiercer.
January saw more borrower interest in variable and tracker rate mortgages, as mortgage holders take a slightly more bullish stance on base rate increases. Where fixed-rate mortgages tended to be the norm in the era of cheap borrowing, the interest in variable rate mortgages is something of a new trend.
At the top of the property market, higher mortgage rates can be more easily absorbed by borrowers, as can the rising cost of living, meaning there can be less need for absolute certainty of mortgage repayments than in the middle-market. Increasingly, this means that our clients that are refinancing and taking out a mortgage are considering tracker and fixed-rate mortgages as viable options on the basis that they may pay slightly more now, but over the long-term, rates may fall as and when the UK’s base rate peaks.
European mortgage lending fell under €5 billion in December 2022, a reduction of 70% against December 2021 figures. Inflation and the European Central Bank’s base rate increase on February 2nd (with the key rate now sitting at 2.5%) have squeezed the market, with fewer European buyers purchasing property. However, we believe these figures are unlikely to reflect the status quo at the top of the market, where European estate agents are still reporting healthy interest in prime property. While a slowdown in volume might reasonably be expected in the middle market, buyers at the top of the market aren’t usually buying primary residences or out of necessity, so these individuals are simply less affected by market volatility and interest rates when it comes deciding when to enter the market.
Lenders remain keen to finance prime European property purchases, particularly given that borrowers moving into the market now are confident in their ability to ride out a potential downturn. We saw strong interest for European mortgages in January 2023, and no marked decrease in demand.
Lack of stock in the UK pushed some borrowers to explore bridging loans in 2022, underlined by the £716.2 million of UK bridging loans transacted by Bridging Trends contributors – the highest amount since 2019.
High-net-worth individuals use bridging loans to complete property transactions quickly, but also for other purposes, given borrowers can effectively release equity from existing property to purchase other assets or invest in other projects or make investments. The bridging lending sector comes into its own if lending becomes more restricted in other parts of the market, or in ‘asset rich, low cash’ scenarios, where wealthy borrowers need to access liquidity quickly. Practically, in January we saw solid interest from borrowers looking to use bridging finance to raise capital for more unusual circumstances, including to consolidate debt and to raise capital for a business, as well as the usual loans to finance property purchases and developments.
This guide is for information and illustrative purposes only and nothing contain within should be construed as advice or a recommendation. The views and opinions expressed in this piece are those of the author and do not constitute advise or a recommendation, and are not intended to indicate any market or industry viewpoints, nor those of other industry professionals. Enness does not give advice on securities-backed lending and lender introductions are unregulated. Corporate financing and lender introductions are unregulated.
Islay Robinson, a founder of Enness, is widely regarded as one of the UK's leading mortgage brokers. He has been instrumental in delivering some of the most complex and high value mortgages in the UK.