Adam Butler

Understanding the new market landscape

Like many other industries, the Covid-19 crisis hit the UK development market hard.

According to the Federation of Master Builders (FMB) State of Trade Survey (Q1 2020), 93% of respondents confirmed that the impact of the pandemic was constraining their output, and 87% predicting that the situation would remain the same for at least the next 12 months. 

Despite this, the construction sector is beginning to re-emerge, albeit slowly. There are tangible signs of activity picking up, with Build UK indicating that June 2020 saw 415 contracts awarded, which was an improvement on the 359 in May; while these figures are increasing, they are still much lower than 2019 levels. Neither developers nor lenders have a quick fix to get back to normal but the road to recovery does have to start somewhere. To move forward, property market participants need to be mindful of each another’s constraints and, by adapting to each other’s Covid-driven challenges, it will help to generate positive momentum.

Lender constraints

In the last few weeks, we’ve seen lenders that paused at the start of the crisis return to the market and others launching new products to reflect a more stabilised industry. It’s a positive step, but we cannot expect to see the same breadth of funding options that were available pre-Covid for some time yet.

Most specialist lenders that rely on securitisation and institutional funding lines will be constrained in the short term by their financial backers. A prudent approach will be in place until there is evidence of more stability in the UK housing market, and a better understanding of the effect this pandemic will have on property prices. Certain locations will be more affected than others, demand for particular types of properties will vary (a factor dependant on the long-term strength of employment and lifestyle changes driven by the pandemic) and there may now be more risk attached to specific schemes. Furthermore, historical liquidity and price data may not be as dependable as it was in terms of assessing the strength of the property and availability of exit options and, so, there will be an element of treading with caution.

We are likely to firstly see a focus on safer and more secure lending. This means a tightening of criteria, alongside a gradual increase in leverage with rates remaining at current levels for some months yet, but possibly retreating slowly in the next six to 12 months as confidence and market strength increases. The sector will need to reach an understanding that the landscape we are seeing now is the new normal; pre-Covid rates and leverage will return, but it will be a gradual transition. 

Developer challenges

Short- to medium-term developer demands are also going to differ.  The FBM indicated that 76% of contributors saw material costs increase in Q1 2020; contracts were also reported as taking more time than usual due to increased delivery times. Cost overruns and unexpected delays are likely to arise across the board. With some lenders requiring loans that are delayed, or which have experienced a cost overrun, to be refinanced - coupled with uncertainty on valuation levels and caution around high leverage - we may see a mismatch between what developers need and what lenders are able to deliver. 

In the very short term, developers will need to find a solution to get existing projects completed and will likely prioritise this over acquiring new schemes. Developer demands may therefore shift to become increasingly dependent on lenders that can be more flexible or can offer hybrid solutions to the Covid-specific recovery challenges.  

Forecasting difficulties

Valuations have been a major talking point during the lockdown period. Although the market no longer has to rely on desktop valuations, some reports still have the material uncertainty clause. There isn’t much clarity around the duration this caveat may be in place for - and that means it’s difficult to assess the strength of a scheme, without making several macro-economic projections in relation to employment, interest rates, salary levels, possible reductions in equity deposits, and general confidence. Completions of deals agreed pre-lockdown will not suffice as there is too much sunk cost bias to pull out of transactions. Development lenders will need to see deals agreed when restrictions are eased, and completed on, which valuers can then use as comparables before the short-term finance market will look anything like what it did in mid-March. 

As pipelines progress, surveyors will start to gain a better understanding of the shape of the future landscape, but we may find that until the threat of a second spike is eliminated, it will fall to lenders to take their own approach around the values used. The hope is that a reasonable compromise is reached and that this is done with the clients’ interests at heart as much as the lenders’. Initially, the blunt instrument that that’s been used has been a reduction in leverage, but over the coming months we are likely to see a more nuanced approach by lenders applying higher leverage criteria on properties that they deem will have a greater level of demand.


For the market to progress, it is going to be a collective effort on behalf of lenders, service providers, brokers and developers. Feedback is going to be vital for lenders to deliver the right product, and clear lines of communication will be important for expectation management. Lenders have a duty to be honest and open, and brokers and borrowers will need to be understanding of constraints and new dynamics. Invariably, competition will also have an impact on the shape of the market; lenders won’t want to find themselves to be off pace with competitors - but for longevity in the industry a prudent approach is going to paramount. 

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