International property finance and Covid–19

Originally published on ePrivate Client.

It is safe to say mortgage lending markets have been challenging in recent weeks in light of the Covid–19 pandemic. That said, when you look below the surface for many (although not all) private banks and niche lenders it has been “business as usual” at least to a certain degree.

So, which areas of the international property finance sector have been hit hardest?

International and regional property finance

The first casualties as the seriousness of the Covid–19 pandemic was confirmed were retail banks. Many withdrew from the mortgage market immediately, concerned about the additional risks and many have yet to return. In general private banks and niche lenders have remained active and indeed recently reported a significant increase in equity release and remortgage requests. It looks as though many HNW investors have one eye on the future and are keen to increase their short-term liquidity. However, this underlying strength has not been replicated across all markets.

Recently we saw a group representing Jersey estate agents canvassing the island’s governing body for additional financial support. Social distancing, withdrawal of properties from the marketplace and a tightening of the local lending market have had a significant impact. While there were initial concerns that private banks were withdrawing lending behind-the-scenes, this situation is starting to improve. There are tentative signs of a move back towards relative “normality” but there is still a degree of uncertainty.

Interest rates and wholesale money market rates

The Bank of England is said to be considering a move to negative base rates after recently reducing rates to 0.1%. While this move had a significant impact on base rate linked mortgages, the situation is a little different in the wholesale money markets.

The withdrawal of some lenders, emergence of additional risks associated with Covid–19 and relative uncertainty has actually seen wholesale money market rates rise. This is completely at odds with worldwide base rates where many experts predict further downward pressure in the short-term.

Lenders demanding increased headroom

It is fair to say that demand for traditional mortgages is subdued at the moment although there has been an increase in remortgages, equity release and second charge mortgages. Many HNW investors are looking to increase their liquidity in the short-term hoping to the take advantage of potential investment opportunities on the horizon. Even though many private banks and niche lenders have remained relatively active throughout these challenging times, we have seen a change in LTV ratios.

Lenders are now demanding expanded headroom between funding and property values which has resulted in lower LTV ratios. This is perfectly understandable in the current environment although slowly but surely rates are starting to creep a little higher, bit by bit.

Bridging loans

There is a growing concern amongst international lenders for bridging loans due within the next 3 to 6 months. This is an area of the market which is seen as “more risky” and it looks so though there will be limited refinancing/extension opportunities in the short-term. Those investors who took out bridging loans may also find it difficult to convert into a traditional mortgage if we do see a significant downturn in property prices. This is a sector of the lending market which the authorities will be monitoring carefully and they may need to provide additional liquidity if lending criteria were to tighten.

Outlook for the international property financing market

History shows that to a certain degree prime property can be insulated from the worst of any financial/property market downturn. Indeed, if you look back at the 2007/8 financial crisis and other challenging environments before that, prime property prices do tend to recover much quicker. There are still concerns about a second Covid-19 wave towards the end of the year but the relaxing of social distancing rules has seen worldwide property markets effectively reborn.

It would be foolish to suggest that international property prices will not see downward pressure in the short-term. That said, as more and more HNW investors continue to increase their liquidity it seems that there are investors waiting on the sidelines to take advantage of any short-term downturn. While the international property financing market is starting to move back towards a degree of relative “normality” there is still a heightened risk which will likely remain for some time to come.