Turmoil on Financial Markets Threatens Property Deals

LONDON-The turmoil in the international financial markets following the attacks on New York and Washington last week has had a knock-on effect for the property sector. A number of large investment deals about to close are facing delays because of a lack of liquidity in the long-term interest rate swap market, according to Brian Laxton, Head of Corporate Finance at Healey & Baker.

The Bank of England cut its base rate by 25bp on Tuesday to 4.75%, a rate not seen since the early 1960s. This followed Monday’s 50 bp cuts by both the US Federal Reserve and the European Central Bank. US base rates are now at 3.00% with European rates at 3.75%.

Superficially, cheaper money is good news for debt-driven property investors, but according to Laxton borrowers are currently unable to take advantage of the new rates. Lenders are generally not providing fixed interest rate quotes beyond ten years, because there is temporarily no liquidity in the long-term interest rate swap markets. ‘In recent days this has affected some property investors due to complete on geared transactions, a problem that will only be alleviated once liquidity returns,’ said Laxton.

The problem is primarily affecting larger transactions of £10 million ($14.7 million) and upwards, looking for finance for 15 years and beyond. ‘This is expected to be a short-term phenomenon but it may have an effect on some major transactions which are due to complete in the next few days,’ said Laxton.

In general, however, decisive action by the central banks to cut interest rates has helped to ensure some degree of normality in the markets. ‘This confirmation that they will take all appropriate action has been of considerable comfort to the markets,’ Laxton said.