A Review of Interest Rate Hedging in Real Estate

Interest rate hedging hit the headlines for all the wrong reasons in recent years. Firstly, the Financial Conduct Authority’s Interest Rate Hedging Products review highlighted how unaligned banks and borrowers can be in executing suitable interest rate hedges. Secondly, legacy swaps with significant mark-to-market overhangs have hampered the flow of transactions in the property market: with many participants having to extend their funding rather than selling assets in order to allow the mark-to-market of their interest rate hedging to reduce.
This research looks at how interest rate hedging products have been used in the real estate market and how behaviour has changed over time, particularly following the global financial crisis. It also provides an analysis of the potential mark to market changes in different derivatives under different interest rate environments, as well as offering a framework for borrowers to consider on entering into interest rate hedging to protect their liabilities when raising finance against their real estate assets.

Return to listing