The uncertainty around Brexit is starting to bite in many industries, and the property industry perhaps more than most relies on confidence to thrive. As the market slows, lenders always get nervous and this feeds through to their lending appetite.

In a market with strong economic growth forecasted, full employment and low interest rates, lending flourishes. Lenders compete for market share, through more aggressive lending; higher leverage, less desirable properties, lower margins, etc. But we now have a situation where the growth outlook has weakened, and although interest rates remain low and employment high what impact does this have on lenders decision making?

The consensus seems to be that Brexit will cause job losses. As a lender, when lending to an end user there is always the concern that they could lose their job and that the loan goes bad. When lending to property developers and commercial property investors, then the effect of job losses are magnified.

Property Development:

For property developers and lenders the loan works backwards. To decide what is fair value for a piece of land, you need to know what the end product may sell for. But, not what it would sell for now, but what it would sell for in 2 or 3 years’ time (i.e. after getting planning and building). A good developer, will know to a high degree of accuracy what the project will cost to build, and they know the profit they need to earn to make the risk worthwhile. So when you subtract build cost and profit margin from the end value, you end up with the land (fair) value.

Predicting the GDV of the site can be tricky at the best of times, as you need to take into consideration where we are in the economic cycle, but when you throw in a complete anomaly like Brexit, then predicting end value is nigh on impossible. As a result people are almost certainly overpaying for sites. On top of that, and as I’ve recently seen myself, the build costs can also move. I received a build quote prior to the referendum and then saw the costs spiral post-vote as most of the building materials were coming from Europe. Although the currency effect is likely to be less pronounced when we leave In March 2019 than after the vote itself, the movement of goods from Europe could cause delays, and also the labour supply in the trades may continue to diminish as skilled labourers move back to mainland Europe where they can continue freedom of movement.

And then once you’ve finished, will people want to buy what you’re building? If the economy is in recession in 2 or 3 years’ time, will there be enough people wanting to buy a brand new home? These are all things that go through an underwriters head when making a decision on your loan.

Commercial Property Investment:

If there are job losses and companies follow through on their threats to leave the UK post-Brexit, then who is going to rent your office space? On top of this you have the continued pressure on retail, so lenders are already being careful in this space.

Due to these reasons and more, lenders have started to look a lot more carefully at transactions. Whilst we are not yet in full retreat, most lenders are exercising caution; reducing leverage, increasing guarantees, or upping DSCR ratios. I say most, as there still seems to be a lot of the less established P2P lending platforms that are still happy to lend (on every deal they see!), but for most lenders they are being more selective, and the difference in this type of market is relationships. Good professionals around you will be the difference between getting approved and not.

In summary, yes lenders are being more cautious, but there are still other underlying factors that will not be impacted by Brexit; not least the chronic housing shortage in the UK and that there are more lenders available than ever.

We have recently placed property development deals at higher leverage than before, and at better rates. Similarly, we have placed loans on retail sites, at close to the lowest rates we’ve ever seen. So whilst things are more difficult, with the right contacts and professionals around you, you can still get access to cheap credit for most projects, so if you’re getting resistance with your usual lenders then get in touch to discuss your requirements.