An afterthought when markets were predicting lower rates for longer, one metric is now top of mind for lenders
Guide
07 February 2023
How the property industry is measuring interest rate risk
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Source: JLL Debt Advisory, Bloomberg
Historically, commercial bank lenders have required a greater than 2 x ratio of property income to interest expense for most investment loans.
As an example of the impact of rising rates, consider an asset yielding 5% (ignoring any income growth) and a hypothetical loan with a 2.00% credit margin. As is evident, the ICR while previously exhibiting a comfortable amount of headroom, quickly falls below the typical loan covenant as the base rate increases.
