Brickflow: The UK housing market after lockdown

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UK Housing market

Not many would have predicted that a global pandemic might be just the fillip needed to kickstart the construction and development industry.

If there wasn’t a desperate need for more housing before Covid-19 then there certainly is now but there is hope that the Prime Minister’s announcement on the 30th June – “build, build, build” – will prove to be just the stimulus needed for developers.

What might the housing market look like after lockdown lifts?

This is the million-pound question!  With a second spike in Covid-19 possible, the housing market has sustained a recent flurry of activity as people try and get moving before life stops again if indeed it does stop but, in the longer term, the doom and gloom of economic recession must surely have a huge dampening effect on house prices?

Commercial developers are also sometimes known as adrenalin junkies loving the thrill of risk as unless you are blessed with a crystal ball then frankly, the housing market could do anything.  Embracing uncertainty and risk should come as second nature to those who speculate in property development but that is of course against the old adage that if you wait long enough, bricks and mortar always come good in the end.  Estate agents have been reporting a very positive and busy property market, perhaps just the backlog of people who were unable to get moving and with a real interest amongst certain sectors of moving out of major cities after Covid.  A busy property market means good, strong selling prices and offers are being made quickly or sometimes being topped but will it last?  Some estate agents speculate that prices may rise in the short term as that pent up demand from families restricted by social distancing is released.

As Jamie McKaye explains the government is about to embark on a huge spending programme to kickstart the economy with the support of massive quantitative easing from the Bank of England so it might be a fair bet that this early activity in the housing market will continue.  There will be two breeds of property developers; those that believe prices will start sliding in a few weeks’ time and who won’t commit funds to new build projects or major refurbishments and the bolder band who may head for build to rent.  However, property developers are dependent on financial institutions who could be taking an altogether different view of events remembering the financial collapse of 2008 and not wanting to catch a cold again.  If lending institutions are cautious this could affect just how much commercial developers will really be able to achieve.

History dictates that a failure on the part of developers to gain adequate finance will stall the housing market and eventually cause a crash which will only ultimately worse the recession caused by Covid-19.  Industry pundits predict that the UK government won’t allow this to happen again and will either spend or borrow to prop up the situation and to avoid housing market collapse.

How do Modern Methods of Construction or MMC fit into this equation?

MMCs are stated processes for a project that are built into the design and planning so that each project has a reduced construction time and cost and majors on elements like sustainability.  MMCs use a mixture of off-site manufacturing and onsite techniques which are revolutionising the construction industry.  MMCs may form a crucial element in the way forward for developers as the government encourages and supports the housing sector and lenders are keener to support businesses which are embracing the latest techniques in technology and design.  Many construction industry experts forecast a rise in the use of MMC experts for property development as banks and other financial institutions look to fund businesses which are high quality, greener, cheaper, quicker and smarter.

An active intervention is CBILs which is the Coronavirus Business Interruption Loan Scheme which has helped some lenders to fund new developments.  But is the appetite there amongst financial institutions to support the housing market by taking a bullish approach to development loans?  Last year, UK Finance and the Federation of Master Builders produced a new guide written to assist small and medium-sized construction companies and housebuilders on how they should present their project to possible lenders.  This is aimed at increasing a successful outcome with a range of ideas and suggestions on alternative avenues if finance is declined.  The journey to obtaining finance is not an easy one and after the property crash of 2008, lenders will understandably be cautious and wish to ensure that the same scenario is not repeated with the impact of this global pandemic.

What are the advantages of obtaining development finance from a lender?

Securing development finance from a lender can be a tricky process but there are advantages inherent in this route which can also make it an attractive proposition and these include:-

  • A developer can undertake a larger project than their own available cash will allow them to pursue
  • It might support fast-tracking a scheme or working on more than one-site at a time which in turn positively affects output and cost savings
  • External finance can help spread the risk during both the building and the sales phase as the developer has the security of knowing that the funding is in place and secure
  • Experienced commercial lenders can often offer expertise and professional contacts as they will usually partner up with the construction company through the process of the build. This might include assistance with land valuation, compliance experts and legal protection.  This can be particularly helpful for new entrants to the development industry or those who are undertaking bigger projects than they have previously managed in the past

What are financial institutions interested in when they consider a new business application?

Lenders are keen to see a demonstrable track record in housing development and particularly experience which is relevant to the current proposed scheme.  Expect bullish conversations around this and robust challenges to litmus test the viability of your project.

Lenders may challenge your plans in certain areas which include:-

  • The projected sales value for the new houses based on comparison with similar properties nearby
  • The forecast rate of sales
  • The projected land values
  • The build costs
  • Professional fees including the agents’ costs
  • What will be the warranties in place upon completion of the project and the correct accreditation from NHBC?
  • The level of developer profit, suspicions can be raised if this figure is too high as this might indicate some unrealistic cost estimates during the build process
  • Wriggle room to deal with variations and fluctuations in terms of both time and cost and also contingency plans for unforeseen or even foreseen problems

What should you expect from the lender?

It helps to think of the lender as a risk sharer rather than as a nut which has to be cracked.  It is really important therefore from the lender’s perspective that he keeps close control over the release of funds and is happy and fully assured that the project has been costed correctly.  Normally, the developer puts in their contribution first as the initial layer and this usually involves the purchase of the land; this reassures the lender that the developer has enough liquidity to commit to the project.  Usually, lender finance only appears in the project after the developer has made a significant investment of their own.

Your lender will also seek to understand the source of developer funding which can come from a number of routes including personal funds, private equity investment or another form.  Lenders are obligated under money laundering regulations to satisfy themselves that the developer’s own money comes from a legitimate source.  So expect some close questioning about your finance proposals and almost every lender will take the same approach.  If the money is being provided as retained earnings in the business then the lender will be keen to understand how this money has been built up after each successful project.  It will help your current proposal if you can demonstrate a clear track record of profit acquisition on previous builds.

How does repayment to the lender work?

Repayment usually starts from the first sale proceeds once the houses are ready for market and the industry standard is 75% of house sales on the site.  The overall process works on what is called a ‘first in last out’ basis so the developer’s own funds will be the first layer in the scheme and then his profit will be last out once the lender has been fully repaid.

And if you are turned down for finance?

Financial institutions will not approve every application for funding that comes before them so there is an element of cherry-picking the best presented and strongest proposals.  From a more bird’s eye view, exposure in the marketplace to the risks associated with commercial development will vary from lender to lender and if that particular institution already has a decent-sized portfolio then they may limit any further exposure to this market sector to protect their exposure.

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Brickflow: The UK housing market after lockdown


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