Following the announcement by the Prime Minister, Boris Johnson, outlining the Government plan to ease the lockdown restrictions in the coming weeks and months, we consider what happens next for the property finance industry.
Is it all doom and gloom?
It's stating the obvious, but the last few months have been extremely challenging for the industry. Lenders have had to re-evaluate their offering, with some completely pausing and removing products, there has been a tightening of criteria, volatile property prices and delays to developments.
There have been many comparisons to 2008, and whilst the circumstances are very different the theme that binds the two together is the question of recovery and how long will it take. On the face of it we are in for a rough ride. Reports from the IMF (2020) and UK Office for Budget Responsibility (2020a) make bleak reading regarding the economy as a whole. Combine this with the historical evidence of how quickly other countries' economies have recovered from pandemics (Hughes et al 2020) and you have might be forgiven for losing all sense of hope. But before you do that maybe consider the following:
A quick economic recovery?
The position of the overall economy will no doubt have an effect on the property finance industry. In contrast to the dire predictions above, there is a view that whilst the economy has received a massive shock, this isn't a traditional crash such as in 2008. Comparisons have been drawn to the impact of significant events such as the 9/11 and 7/7 terrorist attacks. Savvas Savouri, Chief Economist at Toscafund, in speaking to Knight Frank (7th May, 2020), boldly predicts that whilst there will be unemployment, the public sector will be fully employed and expand, and a move from 'just in time' to 'just in case' inventory management will see opportunities in the private sector. Certainly food for thought.
An opportunity investors and property developers?
There can be no doubt that sadly for many businesses, the impact of the COVID-19 will mean that trading will need to change dramatically or even cease. The likelihood that social distancing measures will be in place, in some form, for the coming months, will seriously impact on certain sectors.
Our accelerated shift to online shopping will undoubtedly move forward the need for retail businesses to re-evaluate it's real estate. Our imposed need to work from home, will potentially provide businesses with the opportunity to scale back office space, reducing overheads. These examples, combined with our need for affordable housing, provides an opportunity for investors and developers to capitalise on the repurposing of real estate.
The rise of new lenders?
Whilst lenders have generally tightened their lending criteria and reviewed their offerings, there are others that will be seeing this as an opportunity to grow. Away from the big mainstream lenders, smaller more specialist lenders are increasingly coming to the forefront with product offerings. There can be no doubt that the role of brokers will be important for developers and investors, in sourcing the best commercial property finance terms for their particular project.
It is worth noting that short term lending solutions are likely to be less impacted by the current conditions. Faced with a situation no one could have envisaged only months ago means that developers are looking for alternative arrangements. If long term lending remains difficult to achieve, short term solutions are a more likely, or in some cases, the only route. In addition, a fall in property prices is likely to have less impact on the bridging sector as LTV's tend to be lower in the bridging sector.
A technological revolution of the industry?
The enforced restrictions of recent weeks have given enhanced focus on how technology can support the way the industry functions. Automated valuations (AVM's), electronic ID checks and Land Registry's acceptance of the 'Mercury signing approach' are examples in recent months where action has been taken to ease the processes within the industry and keep the wheel turning.
But do the present conditions represent the dawn of a technological revolution in an industry that has been historically slow to adopt new advances? The opportunity is certainly there, and on a big scale. The rise of Artificial Intelligence (AI), blockchain and cryptocurrencies, are all technologies that could transform the landscape beyond recognition. A report by the Said Business School at Oxford University (2020) offers a detailed analysis, but in reality these are all advances that are being worked on irrespective of the current situation.
What is more likely companies will start to adopt technological improvements to their operating platforms. Whether that is because of a necessity to work round ongoing restrictions, or businesses pausing to reflect on their current offering, is going to vary from business to business. The roll out of 5G will undoubtedly offer up an enhanced digital platform for companies to exploit. For example, Virtual Reality (VR) tours are already on the rise, and could well become far more common place.
We are here to help
Regardless of how long the recovery takes, no one can escape the reality that we are operating in extremely challenging conditions and is likely to remain with us for some time.
At Montpelier Private Finance we have been working hard to ensure we are completely up to date with lenders offerings across the market. Changes are happening hourly rather than daily, and we are poised and extremely well placed to be able to achieve the most advantageous terms the market can offer. If you have a specific project you would like to discuss please get in touch.
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References
A Baum, A Saull and F Braesemann, (2020) "Proptech 2020: The future of real estate," 5th February
Hughes R, J Leslie, C McCurdy, C Pacitti, J Smith, and D Tomlinson (2020), “Doing more of what it takes: Next steps in the economic response to coronavirus”, Resolution Foundation, 16th April
International Monetary Fund (2020), “World Economic Outlook, April 2020: The Great Lockdown”, 6th April.
Office for Budget Responsibility (2020a), “OBR coronavirus reference scenario”, 14th April.