Insights into how Covid affects development finance lending, what it means for developers and predictions for the future.
Needless to say, Coronavirus is having a massive impact on everything and everyone and may continue to do so for the majority of 2020. Deals will definitely be tougher to do in the short-term, but as with every downturn there will be huge opportunities that arise as well.
Property development is usually a 2 or 3 year project, and sometimes longer. Therefore, Covid-19 will be a distant memory at Practical Completion for those schemes that need to be financed today.
How is it affecting lending?
When you speak to lenders, most are saying they are still open for business. And this should be true. They still have the money, and the will to lend, they are simply being hampered by external factors. Therefore, we have a go-slow, rather than a no-no, shut-up shop situation.
We’re also seeing this play out on the live deals on the Brickflow platform at the moment. Progress is being made, albeit slowly. And this should be expected by all parties.
Currently, we stand by the results that the Brickflow search engine produces and we are working with our lender partners to accommodate tweaks in criteria and rate.
As a business, Brickflow’s offering is further enhanced in the current climate, as borrowers aren’t able to speak and meet with lenders as they normally would. If you’re shopping for new projects online, run them through the search engine and see what finance is available immediately. It means you don’t waste time on deals that you don’t have the equity for.
What next?
We’ve had multiple calls this week from developers that are currently on projects. Their supply chains are seizing and work will have to soon stop regardless of any HM government action. This will add time and cost to their projects. Whilst this is the immediate concern, there is also one eye on how much of a hit the end property prices (and profit) will take. But that is for another day.
Personally, I am of the view that this will have a positive impact for the majority of developers. Land prices were far too high and it was a struggle to make deals work. The downward pressure on GDV will mean residual land values will have to be adjusted down as well. This won’t happen immediately, but it will filter through and vendors will become more realistic. Or, they will have to return to building their stock rather than selling post-planning. Therefore, expect more JV’s.
Some lenders will go pop. It’s inevitable. We were at the top of the cycle and there were a lot of ‘new’ lenders taking undue risk to seize their piece of the market (see Lendy). They may also not have the operational know-how and experience to navigate through a downturn. Again, this will mean distressed assets and forced sales will come to market.
The protection of Brickflow users is paramount, and never more so than now. The lenders on the Brickflow platform are well-established and well-capitalised, so we do not expect any problems.
Our predictions:
- More lenders going to the wall
- Discounted deals coming to market, which need quick sales
- More JV opportunities
- Deals taking longer to happen
- Valuers lives being made very difficult (I really do sympathise)
- Land prices falling
- A bright end to 2020
Interestingly (and ironically) the Chinese word for Crisis has two brushstrokes: danger and opportunity. We think 2020 will be full of both for everyone.
Like everyone else, we are at home, but we are available at any time if you want to call and discuss the implications of Covid-19 on your development plans.
Stay home and stay safe.
