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Commercial Lending December blog – Reflections on 2023 and thoughts for 2024

19th December 2023

As we teeter at the edge of another new year, Commercial Lending experts Gareth Davies and Kevin Beevers take a look at the highs and lows of 2023 and what we could expect in 2024.

A recap of this year’s commercial lending market

We started the year with some significant challenges after the backlash of the 2022 mini-budget and the impact that had on the confidence of those within the industry. We’ve all experienced unprecedented interest rate hikes and unpredictable real estate valuations, that were arguably more significant than any time in the previous decade.

Though challenging, experienced investors and lenders adapted, finding opportunities amidst the market flux. In the early part of the year we introduced enhanced product criteria including a new mixed-use finance product to support the evolving needs of the market, which enabled us to secure advantageous deals for clients and brokers. Additionally, our development finance facility now allows borrowing up to £10m per transaction increased from £5m previously.

While we have seen material and rapid increases in the base rate, we’re now seeing an element of stability. The Monetary Policy Committee (MPC) has held base rate at 5.25% for the last 3 periods and the previously very high levels of inflation which were a real challenge for developers are reducing at a faster rate than expected. With the decline in average house prices also starting to slow and mortgage rates reducing, confidence is starting to return to both property investors and developers.

Commercial lending focus areas for 2024

The focus areas for Hodge will include development finance particularly for projects with a Gross Development Value (GDV) of up to £10m-£15m, and mixed-use and commercial investments of similar value. The increased market stability is expected to re-energise developer activity despite higher costs, assuming appropriate land can be sourced at an acceptable price. With a year of falling development starts across the UK behind us, we’re optimistic that development activity will return during 2024.

We also anticipate great value in our stretch senior product for property developers in 2024, providing them with extra leverage where possible as well as providing bridging finance options ahead of converting to development finance or for refurbishment purposes.

While developers costs may be higher than they were a few years ago they can be built into appraisals with more certainty than in 2023 where high levels of volatility could result in the cost position on day one being materially different to that at the end of the project.

There’ll also be a focus on mixed use and commercial investments as we’re seeing growth in demand for mixed use finance where investors are seeking to broaden their portfolios. The Hodge product criteria and pricing is competitive, aimed at meeting the needs of today’s borrowers. 

The future of greener homes and sustainable property development

Despite the government’s recent U-turn on several eco-friendly initiatives, including the introduction of minimum EPC ratings on private rental properties, the focus on energy-efficient homes remains crucial. It not only impacts a property’s value and rental demands, but it works towards the zero-carbon initiative that many consumers and developers are striving toward.

The dramatic levels of inflation, particularly on utilities has shone a light on just how important it is to have a well-insulated home. For developers, building regulations ensure strong insulation requirements for both conversion and new build but there are no such requirements for existing stock. As we’ve seen with commercial property over the past few years, we suspect those properties which are best insulated, most efficient and hold the highest EPC rating are the most likely to hold their value and command the highest levels of rent. This is not only valuable for owner occupiers but also investor landlords and tenants. The cost of ignoring this position for a property owner is most likely to impact when the property is either rented or sold, mainly in respect of demand but also value and income.

At Hodge, we aim to support clients in understanding the value and importance of well-insulated properties and have invested in companies such as Sero, who believe a green, Net Zero Carbon home should be possible for everyone.

What advice would you give brokers and clients heading into the new year?

Preparation is key. Understanding your business goals and having a solid strategy is crucial. Confidence in borrowers and brokers stems from their readiness when seeking funding.

Ultimately, we lend to people, not companies. The confidence that is built between our borrowers and brokers is driven by these key relationships, strengthened by the skillset and experience we offer. So being prepared and open when seeking funding is a massive step forward to building this confidence and helping us help you on your road to finance. 

If you’d like to find out more about how Hodge can help with property development and investment funding, please get in touch with our experienced Commercial Lending team or email us at [email protected] or [email protected].

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