Navigating the Storm: Challenges and solutions for property funds in today's economy

Amy Ferreira, development underwriter at Travelers Europe, explains how insurers are responding to risks in the property market.

Any individual or business managing property is facing one roadblock after another. For starters, interest rate hikes have raised refinancing concerns for borrowers of all types. In residential property, the number of first-time home buyers is approaching a 10-year low. Renting has become more difficult too, with typical rents expected to increase by 5.5% across London, according to research from Savills. This, in turn, will force more people to move farther afield and into a cycle of being unable to afford the deposit they need to step onto the property ladder. Such conditions are driving occupancy rates lower and increasing the cases of tenants looking to break their leases early.

Businesses are struggling too, generating reduced profits and even losses because they can’t pass their escalating costs on to clients. Widespread hybrid work is pushing office occupancy rates lower and increasing the vulnerability of the office sector. This leaves landlords and property funds unable to turn higher rents into greater yields and stronger returns for investors. Though interest rate cuts should help in the months ahead, borrowing costs will remain well above where they have been in recent years.

A higher bar for property funds

So where does this leave property funds that need insurance? They have options but will face stricter scrutiny to demonstrate they have favourable risk characteristics. For example, they can expect insurers to review occupancy levels and rent collection figures in greater detail. Insurers will be assessing each portfolio to determine whether property that is concentrated by type or geography might increase risks. Insurers are scrutinising loan-to-value levels as well: although 60-70% loan-to-value levels were acceptable previously, insurers are now favouring portfolios with lower loan-to-value levels to reduce the risk of losses. Insurers will continue assessing break terms in tenancies in relation to refinancing dates, as liquidity problems could result when those dates are out of sync.

Property fund managers must anticipate their potential consequences in this environment. If they generate lower returns, for example, investors may find alternative investment strategies more attractive, and have more investors looking to redeem. Will they then apply gates to funds, whilst they try to liquidate assets within the fund? Restrictions on redemptions could generate increased complaints and claims. When their mortgage repayments increase, will they be able to fund them? Does their due-diligence process ensure new tenants can cover their rent for the lease term? Established insurers will take on property risks – they just need extra assurance that insureds can weather the challenges of the current economy.

Whilst challenges are emerging in this space, insurers that make strong client connections and understand their risks can find creative solutions to meet complex needs. It’s important to find an insurer that is energised by today’s challenges – and committed to helping clients find protection that gives them confidence.

The information provided in this document is for general information purposes only. It does not constitute legal or professional advice nor a recommendation to any individual or business of any product or service.