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While some areas of the worldwide real estate market are struggling, ultrahigh net worth individuals are taking advantage of extremely cheap finance. The UK base rate currently stands at 0.1% and the Eurozone has slipped into negative territory at -0.5%. Interest on savings accounts has been minuscule since the 2008 US mortgage crisis which has prompted significant interest in the remortgaging and refinancing of real estate assets.
As a company, we have been contacted by a raft of ultrahigh net worth individuals looking to refinance everything from London townhouses to Paris apartments, works of art to classic cars and more. The gearing effect of refinancing valuable assets in order to raise cheap finance has left many ultrahigh net worth individuals extremely liquid and ready to acquire depressed assets.
In recent weeks we have arranged some huge refinancing programs for extensive real estate portfolios. The ability to unlock mortgage finance at anywhere between 1.5% and 3% above the Bank of England base rate offers huge value to many long-term investors. As we head for a liquidity crunch with many property owners forced to sell assets in light of the current lockdown, there will be the opportunity to cherry pick extremely good value long-term real estate. There is also a growing trend towards using refinancing to shore up businesses, snap up good value acquisitions and in many cases simply ensure sufficient cash flow to see out the expected economic downturn.
There is no doubt that the traditional mortgage market is tightening and rates have started to tick higher as some products have been withdrawn from the marketplace. However, the refinancing market is still extremely strong and very liquid with the opportunity to negotiate attractive terms.
Historically, many ultrahigh net worth individuals have taken a long-term conservative approach to property investment and therefore often have relatively small mortgages. This creates scope to raise significant funds on relatively modest LTV ratios which have topped out at around 65%. Examples of recent refinancing deals include:-
We recently refinanced a Knightsbridge property portfolio valued at in excess of £60 million. The funds were raised on a 65% LTV with a mortgage rate of 1.8% over base for five years. This allowed the client to build a war chest for opportunistic property purchases and private equity investments.
One client funded the purchase and redevelopment of a London property out of existing liquidity. However, amid concerns that property prices will fall in the short to medium term, this property has been refinanced on an LTV ratio 50% and an interest rate of 1.5% over base for five years. The idea is simple, invest into depressed assets and then look to refinance after an expected medium-term recovery.
Experts are predicting struggling developers will be forced to reduce their land banks as projects are delayed and cash flow is squeezed. So, it made sense for one of our clients to refinance their £30 million London plot which has a planning application in place. We were able to refinance on an LTV of 50% at a rate of 2.5% over base for two years with 20% AUM.
In recent weeks we have been called upon to refinance not only UK assets but global assets. This included the combined refinancing of a £20 million Kensington penthouse and £14 million Paris home. On relatively modest LTVs we are still working through a sterling mortgage at 2.3% over base, and a five-year euro mortgage fixed at 1.35%. This transaction also included a €1 million AUM to maximise funding and ensure a competitive interest rate.
In a complex offshore multi-jurisdictional refinancing exercise we were called on to raise funds to repay an internal loan, inject capital into a business to increase cash flow and support new property investments in the UK. This complex transaction was a little more expensive at 4.25% over base (with a 0.5% floor).
Despite the doom and gloom surrounding the worldwide real estate market, the luxury property market has remained relatively stable. Indeed a recent report by Knight Frank suggests that London house prices will fall by just 2% in 2020 prior to an expected rebound of 6% in 2021. This relative stability has given many clients the confidence to raise finance against existing assets without having to sell prized real estate out right. The cost of finance, potential rebound in property prices in the medium to long term and the ability to cherry pick depressed assets has not been lost on those looking to the future.
We are seeing pressure on the mainstream mortgage market where traditional valuations are proving difficult if not impossible to carryout. Ultrahigh net worth individuals looking to refinance existing properties on relatively modest LTV ratios tend not to suffer the same issues. Simple desktop valuation on a 50% LTV ratio allow more than enough headroom in the event of a short-term downturn in property prices. Those who overstretched their finances to acquire land, developments and luxury properties could provide once-in-a-lifetime investment opportunities for those with liquidity and able to withstand short-term fluctuations in the market.
The luxury property market has remained relatively stable compared to the overall real estate market. Current finance rates are extremely attractive at between 1.5% and 3% over the Bank of England base rate (currently 0.1%). When you also consider most of these refinancing transactions are interest only this further enhances short-term cash flow. As a consequence, many investors are ready and waiting to snap-up short-term depressed assets.