Interest rate hikes send 738 real estate investment firms under this year. What does this mean?
Insolvencies of real estate investment companies have increased 16 per cent in the past 12 months to September 30, with up to 738 businesses going under.
This is from the 634 businesses 12 months prior, says Mazars, the audit, tax and advisory firm.
Of all real estate investment businesses, insolvencies amongst real estate landlords increased the most over the past year, rising by 35 per cent from 201.
This follows last week’s report from the UK Insolvency Service that revealed the number of firms going bust has risen to its highest level since 2009 — at the height of the financial crisis.
Insolvencies of property developers increased by four per cent, from 224 to 234.
Insolvencies of estate agency businesses increased by 11 per cent, from 209 to 233 over the same period as residential property prices and transactions began to fall.
A driver for insolvencies amongst property landlords and developers is that interest rate hikes have driven up commercial mortgage repayments, leading to some landlord companies struggling to service their debts.
The fall in prices of office and retail property has made it harder for those landlords to sell property to repay that increasingly expensive debt.
Some office and retail tenants have been vacating properties as leases come to an end and landlords have struggled to find replacement tenants.
Insolvencies in sectors like retail, including major tenants like Wilko, have also led some commercial landlords to suffer significant void periods.
The effect of insolvencies amongst real estate landlords in the residential market is a reduction in properties available to rent.
Rebecca Dacre, partner at Mazars, said: “The real estate sector has been hit particularly hard over the last three years. More and more businesses in the industry are reaching the end of the road.
“Landlords are in a difficult position, often carrying large amounts of secured debt which leave them with little room to negotiate, especially as the property market downturn impairs the value of the property.
“Insolvency can be inevitable and within the residential market, will sadly take more and more rental properties off the market and away from prospective tenants,” she added.