Commercial lending: reflections & predictions

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Commercial Team 10 February, 2021
House building - Commercial (1)

January is traditionally a time for reflection and looking ahead. But with the world still living though a global pandemic, making predictions about the commercial lending market in 2021 is a tricky proposition. 

From demands for greater outdoor space and bigger working spaces among residential buyers to decreased house prices, rises in stamp duty, and scarcity of housing stock, we asked our commercial lending team for their views on how Covid-19 has affected the housing market and what to look out for in 2021. 

Head of Development Finance, Gareth Davies, says 2020 started with a clear plan for commercial lenders following the 2019 General Election and the prospect of Brexit – but then Covid-19 hit. 

He says: “We entered 2020 with high hopes. Following the General Election and Brexit vote, we knew the direction of travel. It gave the market and developers confidence and we suspected activity would be strong throughout the year. Unfortunately, Covid-19 then took over and it played a major role in house building and sales activity during 2020 and will undoubtedly do so further into 2021. 

“During the first lockdown, many construction sites were closed and activity slowed down significantly. However, as the industry adapted to the new social distancing measures, many sites quickly returned to activity which meant a continuation to improve the balance between supply and demand of the housing market in Wales. 

“Homes delivered  during the first half of 2020 materially reduced compared to 2019, although this picked up in the latter part of the year as construction activity was allowed to continue. However, new build starts have been significantly slower to rebound, although this is not altogether surprising, given the uncertainties that face us all in 2021 and beyond.” 

Sales activity in April, May and June 2020 was minimal due to the lockdown and restrictions on people’s movements, which all but closed the housing market.  However, there was a considerable bounce-back through the summer and autumn months as restrictions eased. 

Gareth says it’s difficult to predict if the current level of house buying activity and price increases in Wales over recent months will continue into 2021, but many development opportunities have been brought forward and a steady flow of opportunities are proving a positive pipeline for 2021. 

It’s also clear that there has been a surge in demand for homes with bigger gardens and office space for working from home. 

“This is clearly a reaction to Covid-19 and a change in mindset of residential property buyers across the UK.  It’s difficult to know if this shift will continue, and gives rise to questions as to whether we’re likely to see greater movement away from large, more densely populated cities – but we’re already starting to see developers formulating and reworking development sites to best suit the needs of the end user with this in mind,” he added.  

Head of Buy To Let, Michael Clifford agrees that the first Covid-19 lockdown had an impact on transitional activity in March, April, May and June. But, he says the double stimulus of pent–up demand built during the lockdown period and Stamp Duty Land Tax holiday brought with it a sharp increase in transactional activity through July, August and September – which boosted house prices and investor, as well as occupier, demand for assets. 

“There are signs that this surge in demand has abated somewhat in the past few months, particularly in the rental market, where we’re starting to see some correction to the rental price increases seen over the summer. Also, as we approach the end of the stamp duty land tax holiday period, we expect housing market transactional activity to slow. While we expect some volatility in the housing and rental market (mirroring the economy in general) in early 2021, the level of this volatility will be dictated by the speed of the economic recovery and the severity of any downturn that may occur as furlough is removed and economic impacts (like unemployment) crystalise.” 

Michael says it will be interesting to see what shape renter and buyer demand takes as people’s working and social habits adapt to a post pandemic world. Will home working, less frequent travel into city centres, or sharing apartments still be attractive?  

“Looking beyond the end of the pandemic and its impacts, the high–level fundamentals of the housing and rental markets remain. People will need somewhere to live and the supply of houses and flats will still be outstripped by demand for them. This supply/demand equilibrium can only be balanced by the development of more quality housing stock. As Gareth notes, with lower levels of new developments starting, residential assets are likely to remain an attractive asset class for professional  investors, as well as individuals looking for a secure long term income stream to bolster their pension pots.” 

He has also spotted the trend in Buy to Let investors and occupiers searching for ‘essential’ features that have previously been seen as’ nice-to-have’ rather than ‘must-have’ – including home office spaces, outdoor areas, and access to countryside over traditional city centre amenities. 

Managing Director of Commercial Lending, Kevin Beevers agrees it’s very likely that the design of future residential development schemes may be influenced by consumer requirements for better/more home working areas. 

“I think this is likely to occur over time, but the nature of the design, planning, and construction periods for housing mean we’re unlikely to see much actual evidence of this being delivered in practice for some time yet. Regarding current renters though, I think it’s evident that those seeking to move would attach a greater premium to outside space, study facilities etc than would perhaps have been the case pre-Covid-19.  

“Similarly, we have anecdotal evidence of some slackening of tenant demand in inner cities etc, as people feel less of a need to live in immediate proximity to their workplace if they don’t need to spend so much time there physically.” 

He too has noticed an upturn since September, with a strong volume of enquiries, particularly within Development Finance: “This has been a stronger flow than we might’ve expected, given that Development Finance, by its very nature, involves the creation of new assets that don’t as yet exist – and thus would be easier to delay or avoid starting in uncertain times. However, the number and quality of small–scale developers who are keen and confident enough to commit their own equity, livelihood, and reputations to new projects this year has exceeded our expectations. It indicates to me that the development community is confident enough to look through the current Covid-19 crisis, and believe they’ll be selling their finished housing product into a more stable market in 18mths/2yrs, as the projects which are now at inception reach completion.” 

So, despite a buoyant market during 2020, Head of Investment Finance Andy Button admits there may be some pretty tough headwinds to be faced in 2021, including the possibility of house prices decreasing. 

He says: “It’s possible that the continued flexible working practices post-vaccine could also affect the market. It’s been said that the housing market buoyancy in 2020 was attributable to a relatively small group of more well-off households, who already own their homes with modest debt commitments, but driving the market with the savings that they have accumulated this year from working from home. 

“But house prices could be vulnerable in 2021, when the trend towards working from home may reverse as the “office” begins to re-open, stamp duty will be higher, and mortgage rates possibly holding at current levels and similar to pre-Covid-19 levels because of a weakened labour market. So, from a residential investment perspective, scarcity of housing stock, high deposit requirements and subdued wages is going to see renting remain a necessity for a lot of young UK residents who have been hit particularly hard by the pandemic. Houses will still need to be built, and there will still be landlords with equity to purchase.”