Is Brexit affecting Lending?

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, lendersA company or person that lends money to another. always get nervous and this feeds through to their lending appetite.

In a market with strong economic growth forecasted, full employment and low interest ratesThe proportion of the overall Loan that is charged to the Borrower as Interest by the Lender. This is normally expressed as an annual percentage of the remaining loan., lending flourishes. LendersA company or person that lends money to another. compete for market share, through more aggressive lending; higher leverage, less desirable properties, lower marginsThe Gross Income earned by the Lender in return for making a Loan. The Margin should be fixed throughout the Loan Term and will normally track an underlying Cost of Funds., etc. But we now have a situation where the growth outlook has weakened, and although interest ratesThe proportion of the overall Loan that is charged to the Borrower as Interest by the Lender. This is normally expressed as an annual percentage of the remaining loan. remain low and employment high what impact does this have on lendersA company or person that lends money to another. decision making?

The consensus seems to be that Brexit will cause job losses. As a lenderA company or person that lends money to another., when lending to an end user there is always the concern that they could lose their job and that the loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More goes bad. When lending to property developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. and commercial propertyAn asset, normally to be held for the long-term and to produce an income, and / or Capital Growth. Examples include; Hospitality (hotels), Retail (shops), Leisure (pubs), Student Accommodation, Medical (GP Surgery), Light Industrial (Shed / Logistics), Heavy Industrial (Manufacturing Plant), HMO (House of Multiple Occupancy; e.g. Bedsit), Office, Care Home / Retirement and Educational (University / Private School). investors, then the effect of job losses are magnified.

Property Development:

For property developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. and lendersA company or person that lends money to another. the loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More 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 developerAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project., 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 costTypically used in Development Finance, it is the cost of developing a property from its current state, to the finished project. It should be shown separately to the Land Cost, and should include all Planning Costs, S106 & CIL, Warranties, Contingency, Structural Works, First Fix costs, Second Fix costs, Landscaping and Finishing / Dressing Costs. and profit marginThe amount of profit remaining when all costs have been considered. An important figure to determine the viability of a Property Development or Commercial Property investment. 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 tradesTypically used in Development Finance to describe the workers outside of the main Contractor, that are typically needed for Second Fix; plumbers, carpenters and electricians are some examples. 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 underwritersAn representative of the Lender, whose job is to assess a Loan Application, applying the Lenders Loan criteria to that application, to eventually decide whether it is a Loan that they wish to enter into. head when making a decision on your loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More.

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 retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc., so lendersA company or person that lends money to another. are already being careful in this space.

Due to these reasons and more, lendersA company or person that lends money to another. have started to look a lot more carefully at transactions. Whilst we are not yet in full retreat, most lendersA company or person that lends money to another. 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 P2PWhere an individual is able to lend to other individuals or businesses. Although it is the oldest form of lending, it has only been commercialised since the Financial Crisis. Investors are encouraged to deposit money with a P2P lender for a fixed period of time for an agreed Interest Coupon. The P2P lender then makes Loans to Borrowers for a higher interest coupon. These businesses are most prevalent in the Development Finance and small business lending sectors. Sectors that Mainstream Lenders retreated from after the 2008 Financial Crisis. lending platforms that are still happy to lend (on every deal they see!), but for most lendersA company or person that lends money to another. 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 lendersA company or person that lends money to another. 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 lendersA company or person that lends money to another. available than ever.

We have recently placed property development deals at higher leverage than before, and at better rates. Similarly, we have placed loansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More on retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. 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 lendersA company or person that lends money to another. then get in touch to discuss your requirements.