How will the current crisis impact property?
By Stephen Johnson
So the short term lift post-election has been more than shattered by the medical crisis that has emerged since December 26th. The medical crisis has spiralled into a full-blown economic crisis as vast sways of the global economy shut down to fight the spread of the virus.
It’s so early in this crisis to predict anything. Our current situation is almost unthinkable from just 10 days ago. However as a team we have experience of the 2008 financial crisis, and with the benefit of that experience our best guess on how this plays out for property, and the availability of financing, is as follows:
Sentiment is everything in all markets, and the unfolding crisis – and what it means for our daily lives and businesses – must led many to defer any pipeline projects that they are not already contracted on. This has already, based upon our client interaction, led to a dramatic drop off in demand. Allied to this sellers of stock are going to avoid bringing property to the market if they can for fear of being at the mercy of a buyers’ market.
Property values generally track in line with overall economic performance. Our economy is going to suffer a very sharp shock, albeit it in theory you could see this being a shorter period with a hopeful return to normal economic activity as the crisis passes. Therefore, we should expect to see a short term drop in values. Valuers up and down the country have now inserted “fundamental uncertainty” clauses in their valuations as the comparable evidence of just a few weeks ago cannot now be relied upon. This places lenders in a difficult position and will mean they are likely to become more risk averse with loan levels being reined in to provide some mitigation to the uncertain market outlook. In addition, you will see some lenders reduce the time between report and completion to 3 months from the current standard 6 months. Also, some lenders will switch to 90 day valuation figures (i.e. what is the value if you had to sell in 90 days), rather than a normal market value. In this environment this could easily be a 15%-25% reduction from the market value.
Existing property schemes coming to completion are likely to face a very difficult market in which to sell units. Agents have confirmed to us that they have seen a massive change in buyer behaviour over the last few weeks. This could drive more distressed sellers in the market who may have higher levels of bank funding and have no other option than accepting significant discounts to agree sales. This will present buying opportunities for those with cash, and the courage, to take a longer-term investment view.
Investors with money trapped in the markets, and who may have been anticipating accessing this, will now not have that capital to hand, and will logically be looking everywhere else for liquidity rather than close out and realise significant paper losses. These investors maybe supporting development projects and be unable to now provide the agreed funding.
Tenants rent performance is likely to be impacted and its fair to predict a spike in arrears as peoples earning capability is impacted, especially those self-employed. This could put some of the portfolio landlords under pressure with their own mortgage commitments. Already it is clear that no court is going to provide eviction judgements, and that’s before any formal government announcement. It has been announced however that mortgage lenders will provide holidays to borrowers, and there is likely to be state support for tenants as well, this should provide a cushion under this particular stress.
In terms of funding, lenders will be significantly affected, although the degree of this will depend on their funding model. It is fair to predict that peer 2 peer lenders will face a swath of redemption requests from retail investors who will want their cash back. Likewise, high net worth investors and family offices who fund other lenders will also limit further lending to preserve their cash – remember most of them will be seeing problems throughout other businesses and investments. The most likely lenders to remain solid will be those with access to retail deposits and government funding schemes. At a minimum we believe there will be 1) reduction in the amount of funding available on schemes (probably back to max of 60% / 55% of gross development value for senior debt), 2) a probable uptick in pricing to take account of the risk outlook, and 3) lenders reserving capital for existing clients with the demonstrable track record of performance.
Despite the above impact on lenders, mortgages are currently still available across a range of asset types – buy to let, portfolios and commercial. Whilst we expect some upward pressure in mortgage rates, we are still in a period of historically low interest rates. In an environment where capital growth may be supressed in the short term there is an opportunity for investors to lock in to attractive 5 or even 10 year fixed rates to provide security of debt costs. Much like the development finance market, higher leveraged products are being withdrawn from the market, but the banks in particular appear to remain committed at 70-75% LTV.
As in most crisis moments, those who have cash and courage to make decisions based on medium- and longer-term fundamentals will find significant buying opportunities available to them during this period. Many have been on the side-lines for a while with the uncertainty created by the political uncertainty of Brexit. As difficult as it may be to say at a time of such worry and hardship, this could provide a once in a generation opportunity for some.
Please remember that there are myriad of different financing options that can help when you are buying or looking to release capital tied up in projects. We are available to chat this through at any time.