Managing the Impacts of Sustained High Interest Rates on Property Sector Businesses
Chartered Accountants and Audit Specialists share strategies to manage cash flow, secure funding, and optimise tax for property businesses facing high rates
While current interest rates have fallen slightly from their previous record highs, the Bank of England's base rate remains at 4.75%. Although two interest rate cuts were undoubtedly very welcome news for the property sector and other markets, the ongoing above-average rates are a point of concern and financial hardship across industries.
Many banks, lenders, and financial institutions have been slow to implement reductions in borrowing costs, if at all. This has created serious pressure on the property sector in particular, given the high levels of borrowing through products like commercial, development, and construction finance.
Compounded by the effects of high interest rates on consumers and the continued high rates of non-payment of rent, which are causing difficulties for landlords and property management firms, the real estate accountancy specialists at James Todd & Co have put this guide together to share advice and guidance about how to manage and protect property businesses now and for the long term.
Why Are High Interest Rates Such a Financial Pressure Point for the Property Sector?
Our accountancy teams in Chichester, Fareham and Southsea include property experts with years of expertise supporting and collaborating with clients from across the market, from investors and landlords to commercial property businesses and organisations.
As one of the sectors most exposed to market volatility, changes to costs of living, peaks and troughs in average selling and purchase prices, and the availability of commercial and residential lending products, property companies have always needed to be agile.
However, the enormous spikes in interest rates, which remained at 5.25% for an entire year, have put strain on even the most resilient and well-managed firms, where the real-world cost of borrowing has been double or even triple the base rate.
There are myriad reasons this has caused a significant challenge. Still, high interest rates make financing new acquisitions, developments, constructions and renovations far more difficult; rising house prices make selling new developments at a profit more unlikely; and borrowing costs dent consumer confidence, affecting the broader rental, buy-to-let and commercial rental markets.
Opinions and speculation vary, but while some analysts anticipate interest rates finally falling to previous norms within the next year or two, this is some way off. The BoE has indicated that rates will dip from current levels to 3.7% by the end of next year, but this is far from guaranteed and means a further trading year where rates seem almost sure to remain stubbornly high.
How Can Financial Planning Improve the Sustainability and Resilience of Property Sector Businesses?
Financial planning, forward forecasting, and accurate budgeting always become more essential during periods of difficulty. Having a contingency plan, advance awareness of cash flow bottlenecks, and knowledge of how market conditions should impact decision-making act as safeguards from financial complications.
That said, cost management, up-to-date management accounting and tracking of returns, margins and revenues generated by every aspect of a business are relevant to all companies, ensuring clients can seize opportunities and sidestep risks.
Continual financial risk analyses might, for instance, spot fluctuations on the horizon that influence the projects or investments business owners make now or prompt them to transfer or sell assets when there is a strong likelihood of devaluation.
Likewise, locking in an interest rate on a borrowing project or seeking investment earlier than normal could be wise if the general overview suggests less favourable interest rates or access to borrowing in the months ahead.
Although much will depend on the size, nature, and trade of your property business, the action plans below may be beneficial to a range of organisations.
Focusing on Robust Cash Flow Management
Cash flow problems are a leading cause of insolvency and can, in most cases, be managed or even avoided with astute planning. Higher financing costs, outgoings, and overheads can put businesses at risk of default, coupled with the potential of late customer payments—all of which act like a ticking clock counting down until an important repayment or charge is unpaid.
Cutting expenses isn’t always immediately possible, but it can be useful to look for efficiencies to avoid overspending or duplication of effort or administration tasks.
Strategies we've seen in recent months include switching to hybrid working to improve productivity and increase staff retention while saving on the practical costs of running an office premise and analysing all outgoings to cancel anything not essential to the business—often long-running subscriptions that are less than business-critical.
Companies have switched to digital meetings and catch-ups rather than taking several days out of their schedules each month and looked to renegotiate supplier deals and contracts where there is scope to ensure they are getting the best value possible.
The key is to tighten up on spending, improve reporting so you know exactly what is going out of the business, where and why, and forecast expected and estimated costs to identify now where there are cash flow gaps that require an injection of capital or financing.
Sourcing Lower-Cost Funding
We've noted that interest rates aren't expected to fall soon, and for some property businesses, raising prices in line with borrowing is a logical and obvious move. However, this may not be ideal or viable for some companies, especially those in high-competition environments.
While increasing margins to ensure transactions and service provisions are financially worthwhile may be necessary, there are also often opportunities to refinance commercial borrowing products or source new avenues of investment or funding that can reduce the business's overall costs.
Reviewing alternative providers and specialists within the property market in favour of conventional high-street banks, looking for grants and support schemes designed to offer assistance, and taking the necessary time to review and contrast all the options is key.
Improving Tax Efficiencies
Finally, we recommend that any property business struggling with high interest rates take steps to ensure they aren't paying unnecessarily high taxes or missing out on allowances, reliefs, and deferrals that could considerably impact their cash flow picture.
Frozen tax rates and higher national insurance have certainly made the outlook less optimistic for companies with large workforces, but if there are efficient tax management measures available that you have yet to take advantage of, this could be incredibly useful, from capital allowances to VAT refunds.
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About James Todd & Co
James Todd & Co have been providing accounting services for more than 30 years across Chichester, Fareham, and Portsmouth for businesses across the South East. Their clients trust them to provide bookkeeping, financial auditing and compliance, management accounting and financial advisory services.
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Source Company: https://www.jamestoddandco.co.uk/