With parliament in disarray and the stand-off with Europe ever more entrenched, the chances of a no-deal Brexit are now very real. As a result, a significant percentage of prospective buyers and sellers have battened down the hatches. Now — they're increasingly of the opinion — is no time to move.
Understandably, the dearth of transactions is causing all manner of problems across the property market. Admittedly, some regions are seeing a reasonable amount of activity, but others — specifically London and the South East — are running on the transactional equivalent of fumes. The South East's problems have been accentuated by over-exuberant price growth four or five years ago.
The net effect of all of this? Well, the latest RICS report into property market confidence revealed that surveyors are at their most pessimistic about the property market since 1999. When you take into account the fact that this two-decade period involved, among other things, a credit crunch, major UK recession and global depression — aka the global financial crisis — that's some going.
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The point I'm making is that 2019 and 2020 — and perhaps beyond if political and economic conditions deteriorate — could be a difficult time for developers to sell their units. Against this backdrop, do developers have a back-up plan? Renting is certainly one path more and more developers are going down, while those that are hanging on to sell are also proactively reducing their costs by switching to development exit finance.
At Thistle, we've been doing a number of development exit finance deals recently, but this isn't another article harping on about that. Another avenue that developers struggling to offload their units are going down to bolster their financial position is to sell a percentage of them to big PRS (private rented sector) players.
Not only does this create liquidity and cash flow, it also instantly makes a project more attractive to lenders and can mean better rates when a developer seeks finance. After all, funders will be a lot more relaxed about the risk in a project if part of it is pre-sold before a spade even goes into the ground — and at a price that sets the level for the rest of the site.
With generation rent becoming bigger by the day, PRS has been one of the fastest-growth sub-sectors within property during the past decade. Many PRS developers are banks or institutional investors (for example, pension funds) and, if not, are often backed by them. Critically, these major financial institutions have the financial strength to ride out current market uncertainty and look to the medium and long term.
For developers, this can prove a lifeline and is something a decent specialist broker should be raising with them when they weigh up their options in the current glacial market. Done correctly, it can even remove the need to refinance at the back end and speed up the movement on to the next project — which is what it's all about.