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Property outlook: Constructive long-term case for property despite headwinds
16/6/23
5 min
Property finance
Insight
The UK property market will endure more turbulence as the impact of the new rate dynamic is realised. But according to Parik Chandra, Partner and Head of Specialist Lending at Downing LLP, the environment offers opportunity in residential property for both investors and developers, if they can adopt a long-term mindset.
The UK’s property market is facing higher borrowing costs and lower mortgage approvals. This has created short-term uncertainty, as sentiment cools in the face of sticky inflation and stagnant economic growth.
This year, the UK has already seen the largest widespread property price fall since 2009. Meanwhile, Central London property prices have fallen 5% in the 12 months to March, the sharpest annual fall in three and a half years.
Spiralling costs for homebuyers have contributed to a cooling of the housing market since the Bank of England signalled the end to a period of extraordinary monetary easing. This has created uncertainty for the property market, with the direct impact on mortgages and affordability acting as a drag on economic growth.
There also has been an impact on the landscape for residential development finance. Availability of fixed rates are scarce due to uncertainty about where rates will settle. Where fixed rates are available, the quantum of capital is limited - most lending is now offered on variable rates. It is clear the rate dynamic is dominating the short-term outlook.
We have seen some evidence of slowing sales and a decline in purchasers – but it is an uneven picture. In some micro markets, buyers have been easily replaced and values have held up; in others, it’s more challenging.
Early greenshoots
At the beginning of the year, the UK’s three biggest housebuilders, Taylor Wimpey, Persimmon and Barratt Developments, all announced they would rein in the buying of new land and subsequent development.
Yet, recent newsflow shows that fears of a deepening property crunch have been slightly allayed. British property surveyors were reported as less pessimistic about the prevailing conditions in the property market in June – according to the Royal Institution of Chartered Surveyors. And not only did fewer surveyors expect falling prices, but the majority believed house sales would rise over the next year.
Price expectations appear to have reset to the new lending conditions, however, it remains difficult to predict when there will be a real recovery in demand. Our view is that the impact of the new rate environment has yet to be fully absorbed, and both developers and investors must be prepared for further volatility. While a change in the direction of interest rates may be required to sustain a rebound, consumers also need to readjust to a higher, more normalised rate environment. We will most likely be on a static or downward trajectory until the rate situation stabilises.
Moreover, we must factor in that the UK has been flirting with recession for the last year. While to date it has been narrowly averted, GDP growth been anaemic – rising by just 0.2% in the three months to April. High inflation and rising interest rates have put downward pressure on growth, and this is challenging for the property markets as it lowers investment volumes – and impacts the deployment of equity and debt capital.
Expanding the horizon
Despite the complex backdrop, developers and investors should adopt a long-term mindset and remember the resilient nature of the asset class. Through previous cycles, we have seen that developers and lenders who continued to fund and build through a downturn typically emerge stronger – and emerge in a position to take market share – once we revert to the mean.
For retail and institutional investors, the same is true – a long-term time horizon in residential development lending is vital for realising strong risk-adjusted returns. Indeed, investors that understand the space are viewing the present uncertainty as an opportunity. Certainly, well-capitalised quality developers are better equipped to ride out volatility and build their footprint.
Building through adversity
The difficult economic conditions that lie ahead – coupled with a banking retreat from the sector, and the government reneging on the national house-building target – makes it more important than ever that specialist lenders support SMEs to tackle the UK’s drastic housing undersupply.
Whatever the economic weather, we continue making secured loans to property developers delivering residential-led schemes nationwide – and we have seen strong lending despite the conditions. We also continue to consider non-speculative commercial development, and specialist property sub-sectors such as student accommodation.
We also believe the present volatility shows why asset managers are more natural lenders for this asset class. Unlike banks that are constrained by cyclicality, capital requirements and short-term shareholder interests, we can adopt a longer-term mindset and drive returns by actively participating and building partnerships through volatility.
Sustainable foundations
It is not all macro gloom, however. Other interesting longer-term themes are emerging. We see more innovation in sustainable lending attracting elevated institutional interest. This will bring a new level of ESG adoption into residential development lending and encourage standardisations around sustainability targets.
Indeed, we believe sustainability-linked loans can evolve the asset class to incorporate more ESG criteria. Dialogue between lenders, developers and other stakeholders can create ESG scorecards that analyse construction inputs such as the use of renewables and waste efficiencies, as well as considerations such as flood risk, cement and steel volumes, EV chargers and biodiversity impacts. Meanwhile, social aspects can be considered, such as affordable housing.
However, one hurdle is that there is no recognised sustainable body for residential development lending, something we would welcome.
Investors should always prepare for a recessionary event – they are a natural part of the cycle. As a senior debt lender, we are always analysing both macro and micro risks. While we appear to be moving through a slow-moving perma-crisis, the underlying fundamentals of the residential development market remain attractive. Indeed, the current environment might well be looked upon, in hindsight, as an attractive entry point for true long-term investors.
Find out more about Downing's Property Finance team
Share
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The UK property market will endure more turbulence as the impact of the new rate dynamic is realised. But according to Parik Chandra, Partner and Head of Specialist Lending at Downing LLP, the environment offers opportunity in residential property for both investors and developers, if they can adopt a long-term mindset.
The UK’s property market is facing higher borrowing costs and lower mortgage approvals. This has created short-term uncertainty, as sentiment cools in the face of sticky inflation and stagnant economic growth.
This year, the UK has already seen the largest widespread property price fall since 2009. Meanwhile, Central London property prices have fallen 5% in the 12 months to March, the sharpest annual fall in three and a half years.
Spiralling costs for homebuyers have contributed to a cooling of the housing market since the Bank of England signalled the end to a period of extraordinary monetary easing. This has created uncertainty for the property market, with the direct impact on mortgages and affordability acting as a drag on economic growth.
There also has been an impact on the landscape for residential development finance. Availability of fixed rates are scarce due to uncertainty about where rates will settle. Where fixed rates are available, the quantum of capital is limited - most lending is now offered on variable rates. It is clear the rate dynamic is dominating the short-term outlook.
We have seen some evidence of slowing sales and a decline in purchasers – but it is an uneven picture. In some micro markets, buyers have been easily replaced and values have held up; in others, it’s more challenging.
Early greenshoots
At the beginning of the year, the UK’s three biggest housebuilders, Taylor Wimpey, Persimmon and Barratt Developments, all announced they would rein in the buying of new land and subsequent development.
Yet, recent newsflow shows that fears of a deepening property crunch have been slightly allayed. British property surveyors were reported as less pessimistic about the prevailing conditions in the property market in June – according to the Royal Institution of Chartered Surveyors. And not only did fewer surveyors expect falling prices, but the majority believed house sales would rise over the next year.
Price expectations appear to have reset to the new lending conditions, however, it remains difficult to predict when there will be a real recovery in demand. Our view is that the impact of the new rate environment has yet to be fully absorbed, and both developers and investors must be prepared for further volatility. While a change in the direction of interest rates may be required to sustain a rebound, consumers also need to readjust to a higher, more normalised rate environment. We will most likely be on a static or downward trajectory until the rate situation stabilises.
Moreover, we must factor in that the UK has been flirting with recession for the last year. While to date it has been narrowly averted, GDP growth been anaemic – rising by just 0.2% in the three months to April. High inflation and rising interest rates have put downward pressure on growth, and this is challenging for the property markets as it lowers investment volumes – and impacts the deployment of equity and debt capital.
Expanding the horizon
Despite the complex backdrop, developers and investors should adopt a long-term mindset and remember the resilient nature of the asset class. Through previous cycles, we have seen that developers and lenders who continued to fund and build through a downturn typically emerge stronger – and emerge in a position to take market share – once we revert to the mean.
For retail and institutional investors, the same is true – a long-term time horizon in residential development lending is vital for realising strong risk-adjusted returns. Indeed, investors that understand the space are viewing the present uncertainty as an opportunity. Certainly, well-capitalised quality developers are better equipped to ride out volatility and build their footprint.
Building through adversity
The difficult economic conditions that lie ahead – coupled with a banking retreat from the sector, and the government reneging on the national house-building target – makes it more important than ever that specialist lenders support SMEs to tackle the UK’s drastic housing undersupply.
Whatever the economic weather, we continue making secured loans to property developers delivering residential-led schemes nationwide – and we have seen strong lending despite the conditions. We also continue to consider non-speculative commercial development, and specialist property sub-sectors such as student accommodation.
We also believe the present volatility shows why asset managers are more natural lenders for this asset class. Unlike banks that are constrained by cyclicality, capital requirements and short-term shareholder interests, we can adopt a longer-term mindset and drive returns by actively participating and building partnerships through volatility.
Sustainable foundations
It is not all macro gloom, however. Other interesting longer-term themes are emerging. We see more innovation in sustainable lending attracting elevated institutional interest. This will bring a new level of ESG adoption into residential development lending and encourage standardisations around sustainability targets.
Indeed, we believe sustainability-linked loans can evolve the asset class to incorporate more ESG criteria. Dialogue between lenders, developers and other stakeholders can create ESG scorecards that analyse construction inputs such as the use of renewables and waste efficiencies, as well as considerations such as flood risk, cement and steel volumes, EV chargers and biodiversity impacts. Meanwhile, social aspects can be considered, such as affordable housing.
However, one hurdle is that there is no recognised sustainable body for residential development lending, something we would welcome.
Investors should always prepare for a recessionary event – they are a natural part of the cycle. As a senior debt lender, we are always analysing both macro and micro risks. While we appear to be moving through a slow-moving perma-crisis, the underlying fundamentals of the residential development market remain attractive. Indeed, the current environment might well be looked upon, in hindsight, as an attractive entry point for true long-term investors.
Find out more about Downing's Property Finance team
Share
The UK property market will endure more turbulence as the impact of the new rate dynamic is realised. But according to Parik Chandra, Partner and Head of Specialist Lending at Downing LLP, the environment offers opportunity in residential property for both investors and developers, if they can adopt a long-term mindset.
The UK’s property market is facing higher borrowing costs and lower mortgage approvals. This has created short-term uncertainty, as sentiment cools in the face of sticky inflation and stagnant economic growth.
This year, the UK has already seen the largest widespread property price fall since 2009. Meanwhile, Central London property prices have fallen 5% in the 12 months to March, the sharpest annual fall in three and a half years.
Spiralling costs for homebuyers have contributed to a cooling of the housing market since the Bank of England signalled the end to a period of extraordinary monetary easing. This has created uncertainty for the property market, with the direct impact on mortgages and affordability acting as a drag on economic growth.
There also has been an impact on the landscape for residential development finance. Availability of fixed rates are scarce due to uncertainty about where rates will settle. Where fixed rates are available, the quantum of capital is limited - most lending is now offered on variable rates. It is clear the rate dynamic is dominating the short-term outlook.
We have seen some evidence of slowing sales and a decline in purchasers – but it is an uneven picture. In some micro markets, buyers have been easily replaced and values have held up; in others, it’s more challenging.
Early greenshoots
At the beginning of the year, the UK’s three biggest housebuilders, Taylor Wimpey, Persimmon and Barratt Developments, all announced they would rein in the buying of new land and subsequent development.
Yet, recent newsflow shows that fears of a deepening property crunch have been slightly allayed. British property surveyors were reported as less pessimistic about the prevailing conditions in the property market in June – according to the Royal Institution of Chartered Surveyors. And not only did fewer surveyors expect falling prices, but the majority believed house sales would rise over the next year.
Price expectations appear to have reset to the new lending conditions, however, it remains difficult to predict when there will be a real recovery in demand. Our view is that the impact of the new rate environment has yet to be fully absorbed, and both developers and investors must be prepared for further volatility. While a change in the direction of interest rates may be required to sustain a rebound, consumers also need to readjust to a higher, more normalised rate environment. We will most likely be on a static or downward trajectory until the rate situation stabilises.
Moreover, we must factor in that the UK has been flirting with recession for the last year. While to date it has been narrowly averted, GDP growth been anaemic – rising by just 0.2% in the three months to April. High inflation and rising interest rates have put downward pressure on growth, and this is challenging for the property markets as it lowers investment volumes – and impacts the deployment of equity and debt capital.
Expanding the horizon
Despite the complex backdrop, developers and investors should adopt a long-term mindset and remember the resilient nature of the asset class. Through previous cycles, we have seen that developers and lenders who continued to fund and build through a downturn typically emerge stronger – and emerge in a position to take market share – once we revert to the mean.
For retail and institutional investors, the same is true – a long-term time horizon in residential development lending is vital for realising strong risk-adjusted returns. Indeed, investors that understand the space are viewing the present uncertainty as an opportunity. Certainly, well-capitalised quality developers are better equipped to ride out volatility and build their footprint.
Building through adversity
The difficult economic conditions that lie ahead – coupled with a banking retreat from the sector, and the government reneging on the national house-building target – makes it more important than ever that specialist lenders support SMEs to tackle the UK’s drastic housing undersupply.
Whatever the economic weather, we continue making secured loans to property developers delivering residential-led schemes nationwide – and we have seen strong lending despite the conditions. We also continue to consider non-speculative commercial development, and specialist property sub-sectors such as student accommodation.
We also believe the present volatility shows why asset managers are more natural lenders for this asset class. Unlike banks that are constrained by cyclicality, capital requirements and short-term shareholder interests, we can adopt a longer-term mindset and drive returns by actively participating and building partnerships through volatility.
Sustainable foundations
It is not all macro gloom, however. Other interesting longer-term themes are emerging. We see more innovation in sustainable lending attracting elevated institutional interest. This will bring a new level of ESG adoption into residential development lending and encourage standardisations around sustainability targets.
Indeed, we believe sustainability-linked loans can evolve the asset class to incorporate more ESG criteria. Dialogue between lenders, developers and other stakeholders can create ESG scorecards that analyse construction inputs such as the use of renewables and waste efficiencies, as well as considerations such as flood risk, cement and steel volumes, EV chargers and biodiversity impacts. Meanwhile, social aspects can be considered, such as affordable housing.
However, one hurdle is that there is no recognised sustainable body for residential development lending, something we would welcome.
Investors should always prepare for a recessionary event – they are a natural part of the cycle. As a senior debt lender, we are always analysing both macro and micro risks. While we appear to be moving through a slow-moving perma-crisis, the underlying fundamentals of the residential development market remain attractive. Indeed, the current environment might well be looked upon, in hindsight, as an attractive entry point for true long-term investors.
Find out more about Downing's Property Finance team
Share
The UK property market will endure more turbulence as the impact of the new rate dynamic is realised. But according to Parik Chandra, Partner and Head of Specialist Lending at Downing LLP, the environment offers opportunity in residential property for both investors and developers, if they can adopt a long-term mindset.
The UK’s property market is facing higher borrowing costs and lower mortgage approvals. This has created short-term uncertainty, as sentiment cools in the face of sticky inflation and stagnant economic growth.
This year, the UK has already seen the largest widespread property price fall since 2009. Meanwhile, Central London property prices have fallen 5% in the 12 months to March, the sharpest annual fall in three and a half years.
Spiralling costs for homebuyers have contributed to a cooling of the housing market since the Bank of England signalled the end to a period of extraordinary monetary easing. This has created uncertainty for the property market, with the direct impact on mortgages and affordability acting as a drag on economic growth.
There also has been an impact on the landscape for residential development finance. Availability of fixed rates are scarce due to uncertainty about where rates will settle. Where fixed rates are available, the quantum of capital is limited - most lending is now offered on variable rates. It is clear the rate dynamic is dominating the short-term outlook.
We have seen some evidence of slowing sales and a decline in purchasers – but it is an uneven picture. In some micro markets, buyers have been easily replaced and values have held up; in others, it’s more challenging.
Early greenshoots
At the beginning of the year, the UK’s three biggest housebuilders, Taylor Wimpey, Persimmon and Barratt Developments, all announced they would rein in the buying of new land and subsequent development.
Yet, recent newsflow shows that fears of a deepening property crunch have been slightly allayed. British property surveyors were reported as less pessimistic about the prevailing conditions in the property market in June – according to the Royal Institution of Chartered Surveyors. And not only did fewer surveyors expect falling prices, but the majority believed house sales would rise over the next year.
Price expectations appear to have reset to the new lending conditions, however, it remains difficult to predict when there will be a real recovery in demand. Our view is that the impact of the new rate environment has yet to be fully absorbed, and both developers and investors must be prepared for further volatility. While a change in the direction of interest rates may be required to sustain a rebound, consumers also need to readjust to a higher, more normalised rate environment. We will most likely be on a static or downward trajectory until the rate situation stabilises.
Moreover, we must factor in that the UK has been flirting with recession for the last year. While to date it has been narrowly averted, GDP growth been anaemic – rising by just 0.2% in the three months to April. High inflation and rising interest rates have put downward pressure on growth, and this is challenging for the property markets as it lowers investment volumes – and impacts the deployment of equity and debt capital.
Expanding the horizon
Despite the complex backdrop, developers and investors should adopt a long-term mindset and remember the resilient nature of the asset class. Through previous cycles, we have seen that developers and lenders who continued to fund and build through a downturn typically emerge stronger – and emerge in a position to take market share – once we revert to the mean.
For retail and institutional investors, the same is true – a long-term time horizon in residential development lending is vital for realising strong risk-adjusted returns. Indeed, investors that understand the space are viewing the present uncertainty as an opportunity. Certainly, well-capitalised quality developers are better equipped to ride out volatility and build their footprint.
Building through adversity
The difficult economic conditions that lie ahead – coupled with a banking retreat from the sector, and the government reneging on the national house-building target – makes it more important than ever that specialist lenders support SMEs to tackle the UK’s drastic housing undersupply.
Whatever the economic weather, we continue making secured loans to property developers delivering residential-led schemes nationwide – and we have seen strong lending despite the conditions. We also continue to consider non-speculative commercial development, and specialist property sub-sectors such as student accommodation.
We also believe the present volatility shows why asset managers are more natural lenders for this asset class. Unlike banks that are constrained by cyclicality, capital requirements and short-term shareholder interests, we can adopt a longer-term mindset and drive returns by actively participating and building partnerships through volatility.
Sustainable foundations
It is not all macro gloom, however. Other interesting longer-term themes are emerging. We see more innovation in sustainable lending attracting elevated institutional interest. This will bring a new level of ESG adoption into residential development lending and encourage standardisations around sustainability targets.
Indeed, we believe sustainability-linked loans can evolve the asset class to incorporate more ESG criteria. Dialogue between lenders, developers and other stakeholders can create ESG scorecards that analyse construction inputs such as the use of renewables and waste efficiencies, as well as considerations such as flood risk, cement and steel volumes, EV chargers and biodiversity impacts. Meanwhile, social aspects can be considered, such as affordable housing.
However, one hurdle is that there is no recognised sustainable body for residential development lending, something we would welcome.
Investors should always prepare for a recessionary event – they are a natural part of the cycle. As a senior debt lender, we are always analysing both macro and micro risks. While we appear to be moving through a slow-moving perma-crisis, the underlying fundamentals of the residential development market remain attractive. Indeed, the current environment might well be looked upon, in hindsight, as an attractive entry point for true long-term investors.
Find out more about Downing's Property Finance team
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