UK house prices rose by 13.4% in the year to June, the fastest pace of increase for 17 years. This is according to Nationwide and, while its most recent figures show that annual price inflation dropped to 10.5% in July, with the market cooling following the close of the first stamp duty window, it still represents impressive growth, particularly during a pandemic.
As well as rising prices, the number of property transactions has also been strong. In fact, HMRC said seasonally adjusted monthly transactions in June reached 198,240, which is the highest since records began. Both of these factors have clearly been good news for property developers, but the last year has also thrown up its fair share of challenges.
Whilst many construction sites have been able to continue throughout much of the pandemic, in many cases capacity has been reduced as social distancing rules have needed to be observed. Productivity has also been hit by reduced labour as people have been forced to isolate, either as a result of catching Covid, or coming into contact with someone who has tested positive. This is before you even consider the impact of Brexit, which has also reduced the provision of skilled labour. Consequently, getting hold of specialist contractors has proven to be a difficult and often protracted process.
On top of the challenges of labour, sourcing construction materials has also become harder and more expensive. There are a number of reasons for this – Covid has reduced the production and supply of materials and, as time has passed many have become scarce. The incident of a container ship blocking the Suez Canal has also held up the delivery of supplies, and in recent months, the level of constructions has also increased, putting a further drain on resources. The Mineral Products Association has even warned of the likelihood of a short-term shortage of cement, identifying the cause of as the rise in construction leading to record cement demand.
The time taken to source materials often means a delay to construction and so developers have faced a juggling act to ensure they have the right supplies and the correct resource on site at the same time.
Overall, this means that there is a legacy of ‘Covid sites’ that were just beginning, or partially built when the pandemic first struck, and have been thrown off course by the delaying effect of multiple lockdowns and subsequent issues. Many of these sites are nearing completion and face a significantly disrupted exit plan.
Delays during the construction phase of schemes have eaten into the sales phase of the development finance facility. So, for example, where a 24-month facility might typically be 18 months construction and six months sales, many developers are finding that they are only just completing construction at the end of the 24-month period.
Another challenge is that, while the property market has certainly been hot, it was also stimulated by the stamp duty holiday, which no longer presents an incentive to buyers setting out on their first viewing. Finding the right buyers, with stable finances, who are able to secure the mortgage they need to buy a new property can also prove difficult. It’s true that many people have benefitted financially from lockdown if it has reduced their outgoings while income has remained stable, but there are many others whose income has been unstable or reduced due to furlough. And this means that there are many previously viable potential buyers who will not be able to secure a mortgage until their income stabilises.
The combined impact is that many developers are finding themselves at a point where they are now beyond their lender’s LTGDV covenants, which means they cannot easily secure an extension with their current lender.
So, borrowers are left with two options. The first is that they can inject more cash into a deal. The second is that they can restructure the facility, if possible, to extend the sales period (if there are no pre-sales in place). However, this will be at a higher pricing due to the increased risk factor of the higher LTV.
In an effort to combat potential challenges faced by developers, at Sirius we have bee pre-empting issues by keeping in close contact with our clients throughout the duration of their loan lifecycle to understand their current position and where they expect to be in the future. With this information, we can proactively find a solution that gives them more development exit options than they would if they took a more reactive approach and ultimately this means our clients are in a stronger financial position.
At Sirius, we take pride in being able to structure finance packages the suit the changing needs of our clients. In the current environment we find that a lot of developers benefit from splitting their loan so that the bulk of the debt can be serviced at a cheaper rate, while the extra leverage can be secured with private equity houses. This type of approach satisfies the short-term cash flow requirements of developers, enabling them the breathing space they need to sell units and bring down the capital stack before refinancing onto a traditional term loan.
Nicholas Christofi, Managing Director at Sirius Property Finance