2017… A Look Ahead
23 January 2017Fortwell Capital
If 2016 taught us anything it’s not to make predictions. But we continue to do so, especially at the start of a new year. So for 2017 we predict a UK real estate sector shaped by domestic and international events, economic uncertainty, demographics and that most elusive of quantifiable factors, sentiment.
The political scene – taking in Brexit, the prospect of an early General Election, and the new Trump administration in the US – has the ability to impact the sector in a broad range of ways. Brexit, in particular, is likely to cause the banks to maintain a low-risk approach to lending and will continue to unsettle parts of the business world. This will dampen demand for commercial space, particularly in central London.
Sentiment, too, will play its part. Where the rise of ‘populism’ is to some a triumph of democracy, to others it is a presage to disaster. And where there is uncertainty, business hesitates. 2017 might provide some answers but might equally give birth to more questions.
On the economic front, interest rates are set to remain at their current low level making borrowing attractive. But inflationary pressures are building. It therefore remains to be seen how tolerant the BoE will be of an inflation rate one or two percentage points above its mandated 2% target figure – particularly should US rates rise in the wake of Donald Trump’s promised tax-cutting and regeneration programme, which, in turn, will lead to a stronger dollar and even higher UK inflation.
Demographics will continue to be a key influencing factor. Our population is growing and the gap between housing demand and supply widening. The authorities, national and local, appear to have no radical solutions. This is bittersweet news for developers. Whilst they won’t be without work, the often unrealistic demands for affordable housing will make otherwise attractive projects unviable.
On the plus front, significant investment in transport infrastructure – Crossrail, London Tube extensions and, eventually, HS2 – will open up new, under-developed areas of the country to workers willing (and able to afford) to commute. But expect hard-fought challenges from Green Belters, environmentalists and NIMBYs.
The prospect of tighter regulation and further fiscal interventions – aimed at overseas buyers and buy-to-let investors in particular – might also have an impact. Admittedly, it’s difficult to see at this time what spare capacity the principal financial regulatory body, the FCA, might have at its disposal to do so, but it won’t stop HM Treasury looking for new ways to ‘equalise’ the residential market while creating new revenue channels for itself.
To help offset these challenges, expect buy-to-let investors to find new ways of maximising their investments. This could lead to a boom in Houses in Multiple Occupation conversions (HMOs), which would provide opportunities for amateur and professional developers and their lenders alike. Towns and cities with large student populations will prove especially popular for HMOs.
On a micro-level we predict a varied prime and super- prime market in 2017, particularly for big-ticket, single unit developments in London’s Zone 1.
Correctly-priced, high quality units will remain in strong demand as the metropolis continues to attract global mobile capital and seekers of a World City lifestyle (now made cheaper by a devalued pound). However, vendors of lower-quality assets with unrealistic pricing and/or exit aspirations will continue to struggle.
Any associated investor and/or development funding opportunities will need to be scrutinised carefully in light of these new realities.
Of greater appeal to lenders such as ourselves will be the opportunities offered in less-fashionable parts of London, in the wider South-East region, and in commutable areas of high demand. In particular, we will look to ratchet-up working with experienced investors and with small and mid-sized developers (and their advisers) capable of delivering sensibly-priced, multi-unit residential/ mixed-use projects.
However, many developers will find their traditional sources of funding closed to them, despite their admirable track records. They will turn instead, and in increasing numbers, to the alternative lending sector.
Securely-funded lenders equipped with the right expertise will do well out of this. But the opportunity will not go unnoticed by opportunistic players seeking an escape from the overcrowded, low-margin vanilla bridging sector; nor by investors seeking higher returns from their capital.
The effect of heightened competition could be to reduce interest rates and raise risk. But the property development and high-value bridging worlds are not the same as the vanilla bridging world (where these twin effects have, indeed, materialised). They are populated largely by professionals who wish to work, in turn, with professionals. Those who don’t truly understand these niche sectors will soon be revealed.
In conclusion, it is our view that 2017 will offer the right type of funder an opportunity last seen in the immediate aftermath of the 2008 financial crisis. The banks will continue to support their key clients. But regulatory pressures and lingering scandals will limit their financial reach and risk appetite. In their place, lenders such as Fortwell Capital will continue to provide essential liquidity and support where it is needed.