By Martin Mulligan, managing partner, VUCA Treasury
The dozen years following the Global Financial Crisis created a dangerous illusion. With interest rates anchored near or below zero, a generation of property developers, investors and even lenders effectively forgot that debt carries price risk. That amnesia proved costly in 2022.
When central banks finally moved to combat inflation, the adjustment was swift and brutal. The European Central Bank raised rates by 4.5% in 15 months. The Federal Reserve tightened by 5.25% over 18 months. The Bank of England delivered 5.15% of increases within 21 months. For developers and investors who assumed that low and stable interest rates were a permanent feature of the landscape, the impact on cash flows and valuations was seismic.
Market mechanics compounded the pain. Markets began pricing in policy tightening ahead of the first hikes and the cost of hedging instruments like interest rate swaps and caps rose exponentially through 2022, making protection prohibitively expensive precisely when it was most needed. Projects that had pencilled positive returns suddenly required equity injections. Interest cover covenants came under pressure. Valuations fell by double digits across major markets.
Since mid-2024, rate cuts and cooling inflation have provided relief. But this respite masks an uncomfortable reality: underlying price pressures remain stubbornly persistent. In the Eurozone, monthly inflation has dipped below the ECB’s 2% target just twice in four years. In the UK, once. In the US, not at all. Meanwhile, concerns over fiscal sustainability have kept long-term rates elevated. UK gilt yields today exceed levels seen immediately after the September 2022 gilt crisis that brought down the Truss government.
Interest rate risk hasn’t disappeared again and still needs to be addressed
Four Principles for Managing Rate Risk
First, interest rate hedging must be elevated to a strategic consideration. Hedging is often seen as an operational issue, a cost to be incurred to satisfy a loan condition. When used effectively, hedging aligns with and supports the strategic aspirations of the project or broader business, providing clarity over cash-flows and de-risking projects.
Second, abandon the fiction that anyone can forecast interest rates with precision. The forward curve offers the market’s best estimate of the most likely path at a given point in time, but it is a poor predictor of actual outcomes, particularly when exogenous shocks occur. Instead, developers and investors should conduct rigorous scenario analysis. At what rate level does a development project require additional equity? Where does an interest cover covenant breach happen? What would early termination costs look like if the asset is sold? These are answerable questions that don’t require a crystal ball.
Third, timing matters enormously. Markets are forward-looking and price in policy changes well before central banks act. Historically, the optimal window to lock in hedging has been six to nine months before tightening cycles begin. We’re seeing early signals in European swap markets, which have drifted higher over the second half of 2025 and are now pricing in a potential ECB hike as early as 2027, even as near-term policy remains accommodative and inflation close to target. That said, both cap and swap pricing in the UK and Eurozone are currently near multi-year lows – a window that won’t remain open indefinitely.
Finally, the importance of independent advice cannot be overstated. Your Rates Salesperson at the bank is not a neutral party. They’re a profit centre with inherent conflicts of interest, and regulatory constraints prevent them from providing true advice on hedging strategies. Independent advisors can structure transactions to improve risk-reward trade-offs and negotiate materially better pricing and terms.
Current market conditions allow for creative structuring. With no rate increases priced into UK or Eurozone curves for 2026, it’s possible to construct asymmetric protection profiles for clients. For instance, lowering cap strikes for near-term dates rather than maintaining flat strikes across the term. The increased protection and higher probability of payouts more than compensate for modest premium increases.
The Cost of Inaction
The 2022 experience should serve as a permanent reminder: with real estate, leverage amplifies returns in benign conditions but accelerates distress when rates move against you. The developers who will thrive through the next cycle, whether it brings renewed tightening or extended stability, are those who treat interest rate risk as a first-order strategic consideration, not an operational detail to be delegated and forgotten.
The question isn’t whether rates will rise again. It’s whether your business is prepared when they do.
**ENDS
Martin Mulligan is the founder of Vuca Treasury. Since 1994, Martin has structured and sold foreign currency, interest rate and commodity hedges for corporate and financial institutional clients at a number of major banks in Ireland, Australia and the UK. He has also provided subject matter expertise on disputes involving interest rate derivatives. Prior to founding Vuca Treasury, Martin set up and ran the consulting division of a treasury management firm advising firms in the UK and Ireland on all aspects of treasury. www.vucatreasury.com
Interest Rate Hedging: Why Property Developers Can’t Afford Complacency
By Martin Mulligan, managing partner, VUCA Treasury
The dozen years following the Global Financial Crisis created a dangerous illusion. With interest rates anchored near or below zero, a generation of property developers, investors and even lenders effectively forgot that debt carries price risk. That amnesia proved costly in 2022.
When central banks finally moved to combat inflation, the adjustment was swift and brutal. The European Central Bank raised rates by 4.5% in 15 months. The Federal Reserve tightened by 5.25% over 18 months. The Bank of England delivered 5.15% of increases within 21 months. For developers and investors who assumed that low and stable interest rates were a permanent feature of the landscape, the impact on cash flows and valuations was seismic.
Market mechanics compounded the pain. Markets began pricing in policy tightening ahead of the first hikes and the cost of hedging instruments like interest rate swaps and caps rose exponentially through 2022, making protection prohibitively expensive precisely when it was most needed. Projects that had pencilled positive returns suddenly required equity injections. Interest cover covenants came under pressure. Valuations fell by double digits across major markets.
Since mid-2024, rate cuts and cooling inflation have provided relief. But this respite masks an uncomfortable reality: underlying price pressures remain stubbornly persistent. In the Eurozone, monthly inflation has dipped below the ECB’s 2% target just twice in four years. In the UK, once. In the US, not at all. Meanwhile, concerns over fiscal sustainability have kept long-term rates elevated. UK gilt yields today exceed levels seen immediately after the September 2022 gilt crisis that brought down the Truss government.
Interest rate risk hasn’t disappeared again and still needs to be addressed
Four Principles for Managing Rate Risk
First, interest rate hedging must be elevated to a strategic consideration. Hedging is often seen as an operational issue, a cost to be incurred to satisfy a loan condition. When used effectively, hedging aligns with and supports the strategic aspirations of the project or broader business, providing clarity over cash-flows and de-risking projects.
Second, abandon the fiction that anyone can forecast interest rates with precision. The forward curve offers the market’s best estimate of the most likely path at a given point in time, but it is a poor predictor of actual outcomes, particularly when exogenous shocks occur. Instead, developers and investors should conduct rigorous scenario analysis. At what rate level does a development project require additional equity? Where does an interest cover covenant breach happen? What would early termination costs look like if the asset is sold? These are answerable questions that don’t require a crystal ball.
Third, timing matters enormously. Markets are forward-looking and price in policy changes well before central banks act. Historically, the optimal window to lock in hedging has been six to nine months before tightening cycles begin. We’re seeing early signals in European swap markets, which have drifted higher over the second half of 2025 and are now pricing in a potential ECB hike as early as 2027, even as near-term policy remains accommodative and inflation close to target. That said, both cap and swap pricing in the UK and Eurozone are currently near multi-year lows – a window that won’t remain open indefinitely.
Finally, the importance of independent advice cannot be overstated. Your Rates Salesperson at the bank is not a neutral party. They’re a profit centre with inherent conflicts of interest, and regulatory constraints prevent them from providing true advice on hedging strategies. Independent advisors can structure transactions to improve risk-reward trade-offs and negotiate materially better pricing and terms.
Current market conditions allow for creative structuring. With no rate increases priced into UK or Eurozone curves for 2026, it’s possible to construct asymmetric protection profiles for clients. For instance, lowering cap strikes for near-term dates rather than maintaining flat strikes across the term. The increased protection and higher probability of payouts more than compensate for modest premium increases.
The Cost of Inaction
The 2022 experience should serve as a permanent reminder: with real estate, leverage amplifies returns in benign conditions but accelerates distress when rates move against you. The developers who will thrive through the next cycle, whether it brings renewed tightening or extended stability, are those who treat interest rate risk as a first-order strategic consideration, not an operational detail to be delegated and forgotten.
The question isn’t whether rates will rise again. It’s whether your business is prepared when they do.
Martin Mulligan is the founder of Vuca Treasury. Since 1994, Martin has structured and sold foreign currency, interest rate and commodity hedges for corporate and financial institutional clients at a number of major banks in Ireland, Australia and the UK. He has also provided subject matter expertise on disputes involving interest rate derivatives. Prior to founding Vuca Treasury, Martin set up and ran the consulting division of a treasury management firm advising firms in the UK and Ireland on all aspects of treasury.
