Further trouble with refinancing ahead?
* Since the nadir of Q2 2009, according to the MSCI Quarterly Index, cumulative real estate capital growth is still in positive territory at +16.6%. However, there has been negligible capital growth since Q1 2010.

Rolling five-year periods:
* Over the 74 rolling five-year periods since Q4 2000, the typical length of a loan secured on a commercial property, capital growth has averaged 7.7%, with positive capital growth occurring in 43 (58%) of these periods.

Impact on loan refinancing:
* For the quarters from Q4 2017 to Q1 2019, average capital growth over the subsequent five years was negative. Consequently, properties secured on five-year loan terms that ended in the period from Q4 2022 to Q1 2024 are likely to have had lower values at refinancing than at loan origination. This issue is likely to have been prevalent on retail loans since Q2 2014 and in office loans since Q3 2017.

* The pattern of refinancing has not yet reached an inflection point, where loans originated in 2019 did so into a falling market and are thus more likely to face challenges in refinancing. There may be a brief respite for loans originated in 2020/21 before loans originated at the market peak in late 2021 early 2022 require refinancing in late 2025/2026.

* Consequently, we anticipate further borrower distress to persist through 2024, with potential respite in 2025. Nevertheless, the substantial declines in office capital growth from Q2 2019 to Q2 2022, approximately -28% across the board, indicates continued distress for many loans due for refinancing over the next three years.

The latest RES forecast will be out next week. For information on the RES Forecasting Model please email contact@realestatestrategies.co.uk.