How will residential lending be affected by Britain’s decision to leave the European Union? It is a question that many have been asking since the momentous decision on 23 June.
We have had continuous dialogue with our clients since the referendum, and our message is that we are open for business. Banks in general are much more stable than they were in 2008, but I would still expect the UK’s high street lenders to pull back on their terms, especially for development finance.
After all, for some of them, memories are still fresh of the last crash, and development lending is seen as higher risk than investment lending.
We expect high street banks to reduce loan-to-cost ratios for development finance from 65% by about 5-10%. Some may exit completely.
At Investec, where we are more entrepreneurial, we are still active in the 65-70% LTC space and we expect debt funds to continue to lend 75% to 90% for double-digit returns.
We are still keen to lend to the best clients in good locations.
For Investec, the key is not to lend on a particular asset class but to find the best clients and then back them in their specific area of expertise. Inevitably, as perceived risk has grown, banks’ pricing will rise too, and it is true that marginal deals are now off the table.
But looking at the residential sector now, compared with 2008, it is a different world. Properties then were overvalued, bank lending criteria was very loose (remember 110% mortgages?) and the banks were overleveraged and often dependent on volatile money markets for their funding.
Now a set of different metrics is in place and, Brexit or not, eight years on there will continue to be an undersupply of homes, particularly in London and the South East.
This leads me on to the private rented sector.
We gathered the cream of the PRS world – M&G, Patrizia, Apache, Essential Living and Watkin Jones – at Investec’s Gresham Street HQ for a summit on what is now clearly a slowing market.
The experts we gathered continued to be confident about the prospects for the private rented sector, which is expected to perform well as people delay buying homes, opting to rent instead.
We believe that the big winners will be the build-to-rent developers such as Fizzy Living, Essential Living or even Dolphin Living (the brand for working Londoners), as their purpose-built rental product is likely to be more attractive to renters, especially young renters, given the on-site amenities, concierge and so on.
After Brexit, which new ”Brexit secretary” David Davis is on record as saying will take place towards the end of 2018, we do not expect any departure of London professionals to the Continent to be in sufficient numbers to overturn the current structural imbalance between housing supply and demand in the south-east. Even if there is significant migration from London to other European financial capitals, we expect it to be a drawn out process over a number of years.
For this reason, we are also confident in the prospects for housebuilders and believe the recent fall in stock market values of these companies has been overdone. While there may be some slowdown in sales, we would not expect large falls in values.
One possible solution to the slowdown in individual resi sales is the idea of large-scale conversions of unoccupied apartment blocks into PRS dwellings. However, our PRS seminar heard that this was unlikely, not least because apartments built for sale do not have the multitude of on-site amenities that PRS blocks now enjoy, and also have different apartment layouts than those now enjoyed by renters.
What we believe is more likely is that housebuilders will begin to factor in PRS phases within wider residential schemes, especially as they are often forward-funded and therefore cash can be realised more quickly.
One final observation: if values fall in the short term, and if developers do begin to feel some pain, it may be the trigger to allow large institutions to satisfy their biggest frustration, and to be able to start building PRS portfolios of scale by buying from distressed vendors.
The 23 June referendum was a seismic event whose shockwaves will be felt for years to come. It is also likely to have profound implications for the UK residential property market, and for the private rented sector, it could be its coming of age.
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Mark Bladon, Investec Private Banking
