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Colin Throssell

Quantitative Easing - Is now the time to borrow?

​Colin Throssell, Head of Property Treasury, provides an interesting insight into whether the current environment of record low interest rates, and the effects of Quantitative Easing resulting in very competitive all in rates of financing, is now providing an opportune period to take leverage.

There is no doubt that Real Estate debt margins are on the march; the last 12 months have seen a c. 75bps tightening of pricing for UK real estate lending. Banks have renewed appetite, insurers are determined to grow market share and new, alternate lending sources are providing real competition. Gone are the days where lenders ‘lamented’ that, with regards to pricing, “everything starts with a 3” and in fact they are now having to fast push down well into the 2 percents to compete when it comes to lending on prime property.

The same is true across Northern Europe where the major market of Germany is experiencing a nominally lower but relatively equal tightening of pricing, resulting in margins that are threatening the mid to low 1%s.

This resurgence in lending liquidity is not confined to balance sheet lending, it is also apparent in the green shoots of Real Estate debt capital markets. This market has re-opened stutteringly before now but efforts have either been unsuccessful, such as those by Deutsche Bank with Merryhill, or limited in scale and accessibility, such as the exploitation of the US Private Placement market or the Wholesale Bond market by the larger REITs and Funds. Whisper it quietly, however, but the CMBS machine is, after a prolonged period of being mothballed, beginning to crank back up. Whilst associated loan margins won’t threaten the mid-20bps just yet, as they did at the height of the market, BoAML’s recent Taurus issue suggests they could challenge 150bps in the near term.

Considering there were times in 2008 and 2010 where the entire real estate debt market was frozen across Europe, today’s position represents a quite remarkable turnaround.

The return of liquidity is not only being felt in Real Estate lending markets; Global Equities are breaking new highs and corporate bond yields are touching all-time lows (at the time of writing at least). Even junk bonds are experiencing what commentators are calling a “Golden Age”, such are the low returns investors are buying into; the shadows of a “risk-off” world have seemingly disappeared in a blaze of liquidity and optimism.

So what is driving this and will it last?

Unfortunately, it would seem economic fundamentals have not changed overnight. Most “everyday” economic indicators remain depressed, such as unemployment levels, which remain elevated across Europe and North America and perhaps most tellingly, government bond yields remain in negative real return territory. These are significant signs that there is some way to go before the real economy heals and is able to return to material growth, and that, is the only truly sustainable kind of recovery.

A major contributing factor to current liquidity must surely be the effect of the global quantitative easing (“QE”) efforts. In the UK alone, £375bn of cash has been injected into the market and in the USA, $2.9 trillion; truly astonishing figures. Now this QE cash has had some time to trickle down to a more diverse recipient base, the financial market is awash with cheap funds, the effects of which are being felt in equities, bonds and real estate lending markets.

So, if currently liquidity is at least in part reliant on QE, what Governments do next with this instrument will have direct implications for general liquidity and the price of real estate debt. Unhappily, two of the more likely outcomes are rather troubling.

Turn off the QE tap too hard and fast, whilst the real economy continues to struggle and cannot pick up the slack, and liquidity will quickly evaporate. In this instance, from a real estate debt perspective, prepare yourself for a rebound in loan margins and higher total financing costs (given interest rates do not have much room to go lower).

Leave the QE tap on too long, however, and the potential for rising inflation is high. This will, most likely, result in a reasonably rapid increase in interest rates from their current historic lows. In this instance, whilst liquidity might remain and loan margins tighten even further, the increase in interest rates will likely be quicker and more marked, resulting once again in higher total finance costs.

The conclusion would appear to be that now is a very sensible time to be taking leverage. There is an apparent happy alignment of competitive margins and record low interest rates resulting in very competitive all in financing rates; an alignment that may not last long. Borrowers able to take advantage of this effect whilst it lasts are likely to look back rather smugly in future periods at the deals they were able to execute today.

Colin Throssell

Colin Throssell

Global Chief Financial Officer

Colin's biography