"The Withdrawal Agreement is also likely to bring about its own challenges particularly if a suitable trade deal is not agreed."
The report is based on feedback from around 40 contributors including brokers, developers and service providers and covers key topics across last year along with predictions for 2020.
Political uncertainty was the major theme across 2019 which meant that most took a cautious approach to transactions. In particular, lenders kept leverage low (an average of 65% LTGDV for development and 68.5% LTV for bridging) which created increased opportunities for mezzanine and second charge funders. Further conservatism was reflected in lengthened completion times from 7.4 weeks in Q1 2019 to 9.2 weeks in Q4 2019 resulting from increased lender and solicitor due diligence. This also coincided with reduced pressure from borrowers to transact as the UK passed two Brexit deadlines and predicated a continued lack of clarity.
Despite the uncertainty, contributors commented that the market continued to attract new lender entrants; pricing subsequently fell in the bridging space from 9.24% p.a to 8.16% p.a . Additionally, 2019 saw more experienced lenders moving into value-add spaces which also drove down price in the development finance space. On the developer side, those keen to move forward with projects stuck to the relative security of PD schemes which fell into the Help to Buy bracket and chose refurbishments which many perceive to be less risky compared with ground up projects.
Looking ahead to 2020, 90% of respondents believe that the UK will finally reach a Withdrawal Agreement resulting in a short-term period of predictability. 65% of contributors therefore think that developers are more likely to buy sites this year thanks to political certainty. The impact of stability was demonstrated by the UKs response to the 12th December election; Estate Office reported a surge in activity on 13th December and a similar result is expected post 31st January.
Despite this confidence, the report reflects that the Withdrawal Agreement is also likely to bring about its own challenges particularly if a suitable trade deal is not agreed. It is difficult to predict the response from foreign investors and, some of the challenges which the market has already experienced in terms of loss of an EU workforce may be intensified. In the medium term, the market will therefore need time to adjust to the parameters set by the Withdrawal Agreement and the trade deal.
Political factors aside, the report also examines potential opportunities in 2020. With increased interest in modular construction, 2020 may yield greater opportunities for efficiency in the affordable housing sector and, at the other end of the spectrum, there is a growing market for small, high quality units aimed at the retirement market.
The Wrap Up Report demonstrates the slow and steady nature of 2019 and the potential which 2020 has for developers in the UK. However, until there is a clear conclusion around what Brexit means in the long term, the report concludes that the 2020 market could repeat the trends of 2019.
