Landlords urged to be ‘agile’ amid rising gilt yields

George Flynn, director at Savills Financial Consultants, said here has been “significant increases” in bond lending costs for housing associations. 

While the market has moderated following the CPI data release this week, Mr Flynn said that “agility remains key in what is a volatile market backdrop”.

“Generally, bank funding continues to dominate clients’ route to market, which are generally shorter-dated and more competitively priced facilities,” he said.

“Cost of carry and liquidity considerations in an elevated market backdrop are key given the underlying rates backdrop. We anticipate subdued benchmark public capital markets transactions amid this volatility, with smaller, more strategic transactions being favoured.”

Grant Vaughan, partner at financial advisers Newbridge, said clients who need to borrow on the capital markets are concerned as they will have to do so at “incredibly elevated rates”.

He said over the past few years in the sector there has been a lot more borrowing in the shorter-dated bank facilities, and he believes this will continue.

Mr Vaughan advised housing associations to be “a lot more thoughtful in terms of where you need to borrow, both in terms of format and tenor, thinking about what the right avenues are”.

“For those that have the ability to sit back and wait, they will probably choose to do that rather than jumping into the market at this point,” he said.

Mr Vaughan said he would like to see some form of government intervention, but hoped that in the coming months the markets will start to return towards levels seen last month. 

Phil Jenkins, managing director and founding partner at Centrus, said many housing associations have deferred borrowing plans on the expectation of rates “returning to normal” over the course of the past year.

However, he said landlords may need to adjust to a “new normal where ‘higher for longer’ is the norm and business plans will need to adjust accordingly”.

He said: “Some HAs have built up RCF [revolving credit facility] balances pending assumed refinancing in the capital markets, which may in turn put pressure on their level of fixed/floating rate debt. Use of standalone interest rate hedging is coming back into vogue as HAs more actively use the swap market to manage their interest rate liabilities.

“HAs are looking at a growing appetite for medium-term lending on the part of some bank lenders as a means of pushing out refinancing requirements without locking in currently high rates for the very long-term.”

Mr Jenkins said the current rise in gilt yields may be due to bond investors reacting to the heavy programme of anticipated gilts issuance as a result of the borrowing plans set out in the October Budget, as well as gilts closely tracking movements in US Treasuries.

He said: “With UK economic growth grinding to a halt and business sentiment following suit as a result of the higher tax burden announced in the same Budget, the growth and borrowing cost assumptions used in the Budget are worsening, reducing the chancellor’s headroom and calling into question the viability of her plans.

“This loss of confidence in the government’s economic plans and the potential need for higher taxes or borrowing has also caused a sell-off in the pound.

“Falling yields in the last couple of days have been a welcome relief from the recent price action and will hopefully continue, but borrowing costs may remain broadly elevated for the time being, possibly until after the Spending Review which is due to conclude by June.”