Key takeaways: Semiannual Market Update webinar for real estate
Managing Partner, Board Member
Head of EMEA
Real Estate | London
On February 9, Chatham held our Semiannual Market Update webinar for real estate, presented by Matt Hoffman and Jackie Bowie. There was a macroeconomic update covering the U.S., U.K., and Europe, a discussion on hedging considerations and strategies, and a brief update on the IBOR transition. In this piece, we will summarize the key takeaways from this event.
Macroeconomic update: U.S.
- Banks are forecasting 2022 year-over-year GDP growth between 3.5% and 4%
- Unemployment is back down to early 2019 levels after a peak in April 2020
- Key inflation indicators are 2.5-3.5 times higher than the 2% target set by the Federal Reserve
- The market is pricing in up to seven rates hikes in 2022
- The Fed plans to complete tapering by March 2022
- Forward curves have had several significant moves over the last two years
Macroeconomic update: EU and UK
- Strong rebound in GDP in 2021 faltered as policy responses to omicron impacted most countries
- There is still an expectation of materially above trend growth in 2022 at around 4.7% for the U.K. and 4.2% for the EU
- The EU remains in fiscal expansion mode which could be a growth multiplier
- U.K. unemployment remains low at 4.1% even after government furlough support was withdrawn
- EU unemployment is at 6.5%, but this masks some large variances across the region
- Inflation is the major macro story — higher energy prices make up the largest component of the increase; stripping out energy, core inflation is still at very high levels
- The question is whether the higher inflation will persist through 2022 or start to reduce in the second half of the year
- Markets are very concerned about inflation and this has been reflected in bond yields — using the 10-year U.K. gilt and the 10-year German bund as benchmarks — which have moved up materially in only a few months
- The Bank of England raised rates again last week, and while the ECB maintained interest rates, the messaging from both central banks provided some shocks
Hedging considerations and strategy
- Interest rate caps have become significantly more expensive in the current rate environment
- Rising rates mean that existing interest rate caps may have residual value that borrowers can often recoup when terminating existing loans
- Of the attendees planning to change their mix of fixed- and floating-rate debt, 79% plan to take on more fixed-rate
- Cross currency hedging can lock-in favorable repatriation rates for certain pairs/directions
- SONIA transition is complete (for the most part)
- Some have adopted synthetic GBP LIBOR, which is Term SONIA plus the ISDA-fixed credit adjustment spread (11.93 bps for three-month tenor)
- Banks are no longer offering USD LIBOR-indexed loans or hedges, except for extending hedges on debt that pre-dates 2022
- Interest rate hedges do not necessarily fall back to SOFR at the same time as the underlying loans do; borrowers should review loan documentation and discuss this internally
As we look out to the remainder of 2022, we asked our webinar attendees what their top-priority issue will be. Nearly two-thirds of attendees are reviewing their investment and debt financing strategies, while 26% are focused on investments in technology and data management. If any of these topics resonate with you and your firm, please reach out to your Chatham contact to discuss further.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.22-0042
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