"Whilst there is abundant capital circulating in the market, there are factors other than price which are impacting developers’ motivation to transact."
These institutions all hold vast amounts of capital that they are finding difficult to deploy. Challenges in their traditional space continue and the yield gap remains attractive. Public equities seem to have dislodged themselves from the reality of the underlying economy, a corporate debt bubble is being created and sovereign debt is not perceived in the same way as it used to be (from a credit and return point of view). That means that asset backed debt in a jurisdiction like the UK seems like a comparatively safe option and one which can deliver above average returns. Real estate is generally seen as a defensive asset class, and with a little help from the Chancellor it has really performed in a counter-cyclical way. More broadly, our market is also maturing and has presented itself as a viable option for these types of investors; many lenders are starting to adopt technology, track data, focus on sustainable growth, customer experience and long-term stability which suggests that the industry is generally behaving in a more institutional way than it did, say 10 years ago.
Whilst there is abundant capital circulating in the market, there are factors other than price which are impacting developers’ motivation to transact. We have seen increasing demand for higher leverage and this is likely to be because completed units are taking longer to sell; developers are not able to draw on profits to fund their next scheme and so are looking for lenders to bridge the gap.
The tapered extension of stamp duty, government guarantee against 5% mortgages and extension of the Help to Buy schemes should all provide comfort around developer exit options. We’ve seen some anecdotal evidence of developers looking to ride out the Covid storm and more recently being more prepared to pull the trigger on deals. In the past few weeks, developers have been coming to us with a shorter expiry times for planning consents and we are seeing more requests for equity releases against lowly geared or unencumbered properties which suggests that developers are starting to want to move quickly again.
Operational processes are as effective now as they ever were prior to the Covid lockdowns which is a testament to the flexibility of the industry. Even with the potential for longer term partial working from home that may be adopted by some firms the market wide experiment that was forced upon us has led to structural changes in operations that will outlast the virus.
On the whole, the last quarter of 2020 reflected a returning appetite from developers but overlayed with some hesitation around market stability; pre-Covid almost all enquiries came to us at the point of exchange so there was a sense of urgency. During the last quarter of 2020 there was a trend for developers wanting clarity that valuations come out as expected and that our underwriting process has significantly progressed before exchange happens but this appears to have reversed and developers have once again re-gained their appetite to drive forward – and we are seeing this particularly in the new build space, an area that we will commit to supporting even further this year.
Market dynamics are therefore being driven more by levels of developer confidence; capital is ready and available to deploy, government changes are now providing the reassurance required for exit options and operational processes are effective if not better than before. Whilst there are several macro factors that everyone will need to watch over the next few months confidence across all stakeholders in the industry should help us to contribute to the recovery in a post Covid world.
