Looking forward over the coming year, there are signs of optimism in the UK property market. Fitch expects UK house prices to stay nominally unchanged this year, buoyed by banks, such as HSBC, offering sub-4% five- and 10-year fixed mortgage rates for the first time since April 2023.
Jun Liu
The rental market will remain robust, with Zoopla forecasting a 5% growth in rents this year. Further, CBRE sees “commercial real estate as more attractive in 2024”, with the industrial and retail sectors benefiting most as consumer demand grows.
This more favourable backdrop will undoubtedly throw up more opportunities for developers. The challenge will be to secure the finance to capitalise on them, given that banks’ SME lending – including property developers – continues to fall. According to the Bank of England, such lending dropped £14bn in 2022 and fell a further £5.3bn in the first half of 2023.
Aside from ensuring that existing projects are adequately funded, the priority of property development company finance directors (FDs) is to ensure that the company is well positioned to take advantage of the pending revival of the sector.
Fortunately, a range of options have emerged for FDs to consider, with the type and stage of project determining the form of finance. Typically, property developers require both short-term financing, usually between 12 and 24 months, and longer-term financing, which can run between 72 and 240 months. It is usual for short-term lenders to want to see that the long-term financing is in place before parting with any money to ensure the development will not stop midway for lack of funds.
For development finance, a range of alternative lenders have emerged to fill the gap left by larger banks. These include names such as HTB, Landbay, LendInvest, Mercantile Trust, Paragon, Roma, Shawbrook and Aldermore. At present, the interest rates charged are in a 6% to 15% range, depending on the nature of the project and track record of the developer.
Another increasingly popular option is private credit. Companies specialising in private credit for SMEs include Atelier and ASK Partners. For them, the bricks-and-mortar nature and steady income flow of the property that underwrites the loan makes it an attractive option.
A further alternative is the peer-to-peer (P2P) arena. This has enjoyed fast growth over the past few years as property activity has boomed against a backdrop of low interest rates, hitting a total volume of around £400m at the end of last year. Although the Financial Conduct Authority has recently introduced some more restrictive rules, P2P remains a very viable option for SME developers to secure finance.
For short-term refurbishment projects, a bridge loan could be the most suitable option. Bridging loans are designed for the short term until the loan can be paid back or until longer-term financing is secured. Large renovations, on the other hand, could be funded using longer-term bridging finance or a commercial mortgage.
Securing long-term financing or refinance projects that are nearing completion will become easier this year, thanks to the recovery of the UK corporate bond market. After experiencing its worst losses in 40 years in 2022, the market perked up last year, with almost £1bn of net inflows in the first four months of 2023. Appetite for UK corporate bonds is good at present as investors look to take advantage of high coupons and decent yields on high-quality assets before interest rates start to come down.
FDs must also find ways to mitigate the effects of rising construction and materials prices. As part of their business model, developers can focus on opportunities to retrofit and refurbish properties, all of which consume fewer materials and less labour.
Such projects are very much in vogue, with new legislation deregulating retrofits being rolled out and town planners and policymakers looking for easy solutions to the housing shortage and to revive town centres.
The scope for redevelopment is huge. According to property data platform Searchland, 28,000 sites exist in the UK that could be converted to residential properties, with a market value exceeding £1.5bn.
Overall, FDs can approach 2024 with a spirit of optimism as the problems that have dogged the sector begin to abate. Longer-term trends also favour the market, with the urgent need for housing and the UK, particularly London, being highly regarded as a global residential and commercial arena. With a savvy approach to avail themselves of the commercial and funding opportunities, FDs can help their companies thrive as the economy and the sector begin their respective recoveries.
Jun Liu is chief financial officer of Nacropolis Group