Pre-Commitment Decision
How to Stress-Test a UK Property Deal
Investor with a specific deal on the table, wants to pressure-test it.
Key facts
- A stress test is not a sensitivity; it is a set of scenarios the market has already delivered, applied to your specific deal.
- Rate shock of +200 basis points is conservative by recent standards: the Bank of England base rate rose from 0.1% to 5.25% between 2021 and 2023.
- Void shock should be modelled as a full quarter of zero rent in year 2 and year 4, with cash reserves absorbing it.
- Exit shock of 15% is within the range of peak-to-trough falls seen in some UK regions during 2008 and briefly in 2022–23.
- If a deal cannot survive all three shocks simultaneously, the price is too high or the leverage is too much.
A deal that only works on the base case is a deal that only works in a memo. We stress every UK property assessment against three shocks the market has actually delivered inside the last decade.
How should rate shock be modelled?
Rerun the model at a fixed rate 200 basis points above your current quote. If interest cover falls below 125%, the deal is fragile and you are betting on rates, not the asset.
Rerun the model at a fixed rate 200bps above your current quote. If interest cover falls below 125%, the deal is fragile.
How should void shock be modelled?
Model a full quarter of zero rent in year 2 and year 4. Cash reserves must absorb it without forcing a refinance or a distressed sale. If you cannot hold six months of costs liquid, you are undercapitalised.
Model a full quarter of zero rent in year 2 and year 4. Cash reserves must absorb it without forcing a refinance.
How should exit shock be modelled?
Assume a 15% price fall at your planned exit. If the net position is still acceptable, the trade is not dependent on capital growth to break even. If it is not acceptable, the price is wrong.
Assume a 15% price fall at your planned exit. Is the net position still acceptable, or does the trade depend on capital growth to break even?
Three-shock stress test framework
| Shock | Scenario | Pass / fail test |
|---|---|---|
| Rate shock | +200bps on current quoted rate | Interest cover stays above 125% |
| Void shock | 3 months empty in year 2 and year 4 | Cash reserves absorb lost rent and costs |
| Exit shock | 15% price fall at planned exit | Net proceeds still meet your minimum return |
| Combined | All three at once | No refinance, forced sale or breach |
Want this decision reviewed for your specific deal?
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