Mortgage Rates Rise on Middle East War
Sign up to learn how to develop commercial awareness and apply it effectively in training contract and vacation scheme applications.
If you are building your commercial awareness for law firm applications, our Commercial Awareness hub covers current deals, sector developments, and how to use them in applications and interviews.
Major UK lenders like HSBC and Nationwide have raised their fixed-rate mortgage prices in light of the war which has broken out in the Middle East. This is tied to concerns that the Middle East conflict would push up energy prices and thus inflation, delaying expected Bank of England interest rate cuts.
Mortgage brokers report that the market mood has been impacted by the war, with clients rushing to lock in deals before further rate increases, and many clients switching from tracker mortgages to fixed-rate mortgages to avoid volatility.
Rising interest rates triggered by geopolitical shocks extend beyond just residential mortgages, also affecting the commercial property markets upon which multinational corporations rely when making long-term real estate decisions. Retailers, logistics companies, manufacturers and technology companies would all typically lease rather than own commercial property, which means these corporate organisations would have their tenant negotiations and corporate real estate strategy impacted.
But at the same time, commercial property valuations move inversely to interest rates as the cost in maintaining the property is higher when rates are higher. This means property developers and commercial landlords holding properties like warehouses, office blocks and retail units will see a fall in the value of these assets.
What does this mean for the commercial property market?
- Commercial landlords will face refinancing pressures as rising rates reduce asset valuations and trigger loan covenant breaches, perhaps forcing distressed sales
- Corporate tenants gain negotiating leverage with distressed landlords but face uncertainty with regards to the solvency of said landlords.
- Retailers and logistics operators will have to rationalise the cost of property portfolios amidst rising energy and rent costs, especially when consumer spending is dampened by mortgage rate rises
How to use this in applications
Corporate occupiers will need real estate advice from law firms as the financial condition of commercial landlords shifts negotiation dynamics. Law firms will be able to advise corporate tenants on how to extract the maximum possible level of concessions from landlords under refinancing pressure (rent-free periods, cap on service charges, break clauses if business conditions deteriorate).
Law firms will have to also advise commercial landlords that will be more focused on the restructuring of leases. Retailers facing both increased rates and a drop in consumer spending to bring in revenue might choose to exit stores that do not survive the cost/benefit analysis, and the appropriate documentation will have to be put in place to make these sales possible.
For those tenants closer to insolvency because of the rise in rates, the restructuring and insolvency teams at law firms will have to advise landlords on restructuring arrangements that may involve reduced rent in order to avoid tenant defaults.
We explain how this story can be discussed in written applications and interviews. Register now for free to unlock the full article.
Register now to unlock the full free article
