Michael Dean

Entering the era of de-risking



The 2019 property market creates an unclear picture and over the past 18 months, we have seen the industry adjusting to this sentiment of uncertainty.

Evidence from Avamore Capital’s most recent bulletin demonstrates the market ‘de-risking’ on transactions.

Headline figures from the unregulated bridging and development finance spheres support this theme and market trends are emerging as a consequence of this changing dynamic.

Unregulated bridging and development finance dashboard


The average loan terms for unregulated bridging and development finance are unusually high at the moment, developers are compensating for longer build periods and accounting for a potential slowdown in construction and activity until the impacts of Brexit become clear.

Furthermore, many are factoring in more time to secure sales within the extended cycle.

On the lender side, the market is witnessing reduced leverage with many funders looking to de-risk deals.

Simultaneously, GDVs are falling and so there is less capital in the market available for developers.

As a result, we may see a greater need for JV equity partners and mezzanine finance. 

The average loan terms for unregulated bridging and development finance are unusually high at the moment, developers are compensating for longer build periods and accounting for a potential slowdown in construction and activity until the impacts of Brexit become clear.

Furthermore, many are factoring in more time to secure sales within the extended cycle.

On the lender side, the market is witnessing reduced leverage with many funders looking to de-risk deals.

Simultaneously, GDVs are falling and so there is less capital in the market available for developers.

As a result, we may see a greater need for JV equity partners and mezzanine finance. 

Land values


Valuers are corroborating the sentiment that GDVs are falling.

This is putting increased pressure on developers, who will find it difficult to secure enough funding for projects in the current climate.

Build costs have risen due to the weakening pound (and are expected to go up even further following a no-deal Brexit) and now developers are building in enough margin to envisage any drop in the market which would be deemed extreme in order to safeguard themselves.

As such, the viability of schemes is dwindling unless land values soften.

For landowners with high holding costs, there may be some urgency to sell at reduced prices, but for those with low holding costs, it is likely that they will maintain sites until the market corrects.

While some developers may be able to pick up land from distressed owners, most will be unwilling to pay high prices at this stage, so we may see a slowdown of development activity in the short term.

Increased rental exits


For those that are moving ahead with projects and completing within the next few months, it is reported that most are not even considering sales as an exit strategy.

Instead, they are looking to rent units.

This is reflected in the increased need for buy-to-let products.

This trend is encouraging lenders to expand their product offering to meet the new demand.

For the end user, fewer are willing to buy in times of uncertainty and so we are seeing increased demand for rentals, which is putting upwards pressure on prices, particularly in the South.

As more developers build-to-let, this trend will hopefully correct in the medium term.

Conclusion


The uncertain market is naturally causing lenders and developers to tread a cautious path.

While some could argue that now is the time to take a ‘watch-and-wait approach’ — provided the viability of schemes and exit routes have been carefully considered — the market still presents opportunities for the most confident developers.


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