We scour articles and read opinion on the status and future of development in the capital and almost always find a disconnect between what we read and what we see.
At times, it is almost as if some commentators are looking for the bad rather than the good. ‘Surely not’, I hear you cry, but that’s certainly what it feels like on occasion.
While I believe the London property market has undergone a correction, we believe that, right now, a lot of bad news has been priced in. However, London is, and will continue to be, a preeminent international business centre, and the Covid-19 situation will not last forever. This means that it will continue to see strong demand for new properties to cater for population growth and attract real estate buyers from overseas. The latter especially, when this is coupled with the effective exchange rate of pound sterling, which is down nearly 20% since the end of 2015.
The cumulative effect of a real estate market correction and the depreciation of pound sterling means that London real estate is now attractively priced in comparison with other international business centres. While activity in the London market will remain subdued as long as the economic uncertainty arising from Covid-19 and the political instability surrounding Brexit negotiations persists, we believe that the upside potential now clearly exceeds the downside risk.
We are actively looking to increase our loan book exposure within the London market and believe that our flexible approach makes us well placed to do this. A recent deal we completed, worth nearly £1m on two properties in south west London bears this out.
On this occasion, we were approached by a borrower — a building contractor — looking to expand into property development. His initial requirement was for a 65% first-charge loan to fund the purchase and refurbishment of a property in Battersea, with a market value of £1.3m. Things were progressing nicely but, as the deal was nearing completion, we learnt that the applicant had a cash shortfall of around £100,000.
To ensure the deal could progress at pace, we quickly arranged a valuation on another property owned by the applicant, in nearby Sutton. Valuing the Sutton property at £1.5m, we were in a position to offer a 54% LTV second-charge loan, enabling the applicant to cover the shortfall. This was put in place in just 10 days and the deal was able to go ahead, with the borrower securing a total loan of £950,000 over 12 months, at a rate of 0.8% per month.
This is just one example of where opportunity continues to exist in London for development finance lenders with a flexible approach. There is little doubt that demand for borrowing against property in London and the South East is showing signs of increasing again.
Lower prices are bringing developers back to the capital and there is certainly the expectation of an increase in numbers over the next year. There are many lenders that will do standard short- and long-term loans. However, it is those lenders that are prepared and able to think creatively, to help those whose requirements are more complex, that will have a bright future in both London and beyond.