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Keep calm and carry on: development sector remains robust

Only a little while ago, the Bank of England base rate was at a record low, ultra-cheap mortgages were in abundance and property prices were climbing strongly on the back of soaring demand.

Fast-forward to today and the market looks like a very different place, indeed.

In an article I wrote a few months ago, I warned of an impending slowdown in the UK’s property market. However, the pace at which conditions have changed has taken us all by surprise.

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In those few months, the Bank of England has hiked rates to a high of 3.5%, the economy is heading for recession and, according to surveyors, demand for property is falling. That has had a knock-on effect on house prices, which fell on a monthly basis in October for the first time since July 2021, according to Nationwide’s House Price Index. On top of that, some have predicted a sharp fall in house prices next year, as households grapple with rising mortgage rates and soaring inflation.

But while the outlook may seem gloomy, let’s not forget the fundamentals that underpin the housing market in this country.

The UK is property-obsessed and therefore, while transactions may dip in the short-term, history suggests that the market will recover.

It’s also worth remembering that we, as a country, do not build enough houses. Experts often say we need to build 300,000 new homes a year to keep up with household formation, but we haven’t done that since the 1970s. Until that happens, house prices will continue to be supported by the imbalance between supply and demand.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division

Another thing to note is that we’ve seen foreign investment in the UK’s property market hold up well, proving that the asset class remains attractive to investors. Softening house prices and a weak pound will actually boost the attractiveness of UK property to foreign investors even further, which might offset lower activity from domestic investors.

If anything, then, I expect the specialist end of the market, such as bridging and development finance, to remain fairly robust, even if activity tails off in the mainstream market. However, that is not to say conditions will remain the same for investors and developers as they had been.

Specialist lenders retain an appetite to lend despite the worsening economic outlook, but it’s clear that developers will have to pay more for finance in the future than they did in the past.

Truth be told, development finance has arguably been artificially cheap for too long, so a correction was due at some point. The rates developers pay have gone up, but with most of the expected increases now priced in, we should see them begin to settle.

Lenders may also want to see proof that developers are controlling costs in a high-inflation environment. That means not overpaying for land and developing good relationships with builders’ merchants to ensure you can lock-in your long-term costs.

However, like I said, I am confident that lenders will not turn off the taps. While they will want to manage the increased risk that comes with a challenging economic environment, they will also want to compete hard for the business that is left.

Although conditions do look challenging, I do believe that the development sector will hold up relatively well in the coming months.

By Guy Murray

Source: Development Finance Today

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How can tax-efficient schemes support property developers?

Looking at the skylines of the UK’s main cities, one cannot help but be amazed by the volume of residential and commercial construction currently under way.

Rising population and demand have led to an increase in the construction of new-build developments, which are being marketed towards either first-time homebuyers, property investors seeking attractive rental yields or homeowners aiming to move up the property ladder.

As someone who works closely with small and medium-sized property developers, I have witnessed first hand the challenges they can face when taking on new projects. Moreover, with the persistent imbalance between housing demand and supply, there’s no denying the vital role SME developers are playing in a bid to address the housing crisis.

That’s why I believe it is imperative for the government to support property developers. Thankfully, it has already taken steps in this direction. Earlier in the year, the British Business Bank launched the ENABLE programme – a £1bn scheme to fund homebuilding developers.

Given the huge strain that the property market is currently under, however, more creative reforms are needed, thereby ensuring developers are able to carry out the task of delivering enough suitable housing.

The housing crisis

Estimates have put the number of new homes needed in England at between 240,000 and 340,000, accounting for new household formation and a backlog of existing need for suitable housing. Despite this, in 2017-18, the total housing stock increased by around 220,000.

Not only do these figures demonstrate the scale of imbalance between supply and demand, they also indicate the pressures developers face to deliver housebuilding. But despite playing a central role in achieving these ambitious targets, the number of SME developers is in decline; in 1988, small builders were responsible for four in 10 new-build homes, compared with just 12% today.

Challenges facing developers

Among the barriers standing in the way of SME developers today is access to finance – or, rather, a lack thereof. A survey prominently revealed that the majority of small developers (57%) identified this issue as the biggest obstacle they faced when attempting to take on a new project.

This can largely be explained in terms of an industry-wide shift in the culture of lending since the 2008 financial crisis – traditional lenders have become more risk averse. But this statistic should also serve as a wake-up call to the government. They need to improve both the availability and terms of financing for residential development.

For the country’s smaller developers, a lack of funding means they are often forced to take on huge risks. For instance, most SMEs building fewer than 100 to 150 homes per year are currently reliant on project finance, which is agreed on a site-by-site basis. Not only is this approach extremely inefficient (for both lender and borrower), but it also involves significant additional fees for entry, exit and legal agreements.

Can tax schemes help?

The challenge lies in ensuring that developers have access to the funding they require to purchase sites and commence building projects. So, I pose the question: can we take inspiration from some successful tax schemes that have funnelled private capital into different sectors of the economy?

Let’s use the Enterprise Investment Scheme (EIS) as an example. Since being launched in 1993-94, it has played a crucial role in supporting the country’s start-ups and SMEs – and, in turn, the growth of the wider UK economy. In short, the scheme provides tax incentives to investors that invest in small and medium-sized companies, helping those that might otherwise struggle to raise finance. Nearly 30,000 companies have received investment through EIS and more than £20bn worth of funds have been raised.

Replicating such a scheme within the housing sector would incentivise private investors to invest part of their capital into SME developers. In turn, this would widen their access to finance and ensure developers can confidently get projects off the ground.

We need proactive policymaking to help developers in their plight to realise housebuilding targets and ultimately solve the housing crisis. Importantly, introducing incentives and reforms to the tax system must come as part of a wider effort to reduce the hurdles SME developers are attempting to overcome.

By Jamie Johnson

Source: Property Week

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UK property undersupply highlighted by new £1bn government investment

In partnership with Barclays Bank, the UK government has announced a ten-figure loan to help support small and medium-sized property developers to build close to the 300,000 new homes per year targets suggest the UK needs.


  • UK government and Barclays Bank have announced a new £1 billion loan to support British property developers in delivering more new homes
  • Up to £100 million will be made available to each developer, as the government aims to meet its targets of bringing 300,000 new homes to the market each year
  • Rising demand for rental homes is driving rents up in key investment cities

Does this highlight the huge undersupply of property in the UK?

As demand continues to outstrip availability, the UK government and Barclays Bank have announced a new £1 billion finance deal to help support small and medium-sized developers in the country build more homes.

Housing Secretary James Brokenshire hailed the opportunity as another important step in “giving smaller builders access to the finance they need to get housing developments off the ground”.

The Housing Delivery Fund will be overseen by the government’s Homes England delivery agency and will help to open up the housing market to a greater share of property developers. As much as £100 million will be made available to developers able to demonstrate the necessary track record and experience in delivering the type of properties today’s homeowners and tenants demand. This includes purpose-built apartments for rent.

Brokenshire added: “This is a fantastic opportunity to not only get more homes built, but also to promote new and innovative approaches to construction and design that exist across the housing market.”

John McFarlane, Barclays’ Chairman, commented: “There is a vital need to build more good quality homes across the country.  This £1 billion fund is about helping to do exactly that by showing firms in the business of house building that the right finance is available for projects that help meet this urgent need.”

Government targets dictate that the UK needs to build 300,000 new homes each year by the mid-2020’s to meet the rising demand for property across all sectors of the market.

In the private rented sector, traditional buy-to-let homes can no longer meet the needs of the UK’s rising number of younger tenants; those that demand experience living in prime city centre locations.

Source: Select Property

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Leasehold homeowners trapped in unsellable homes

Many new-build leasehold homeowners in England have been trapped paying ground rent fees that rise at an alarming rate rendering their properties unsellable, an investigation has found.

At least one property developer has included punitive doubling of rent clauses, and its recommended conveyancers failed to properly explain these clauses to some buyers, according to the report by campaign group, Which?

One Taylor Wimpey homeowner reportedly told Which? that six years after purchasing the home, she discovered her ground rent fee would double every decade.

It meant that between 2008 and 2058, the ground rent would leap from £295 to £9,440 a year.

The home in effect became unsellable after estate agents refused to market the property.

She had previously been informed by her conveyancer that ground rent would increase every 25 years.

The firm later blamed the wrong information on a “typographical error” according to Which?.

Homeowners left feeling ‘duped’

A trend for selling new-build houses on a leasehold basis has emerged in recent years, with an estimated four million properties in England alone.

Taylor Wimpey last year launched a redress scheme to amend leases so ground rent rises in line with Retail Price Inflation (RPI).

Some homeowners also said they had asked to purchase their freehold upfront but were discouraged by Taylor Wimpey staff, only to later find out it had been sold to a third party.

Which? also received complaints from homeowners whose freeholds had been sold on by other big developers.

Homeowners have been left feeling “powerless and duped”, Which? said.

Permission fees to improve homes

The Which? investigation also found examples of homeowners being hit with unreasonable ‘permission fees’ from third-party freeholders to make improvements to their own homes.

Homeowners reported fees of as much as £2,500 to build a conservatory, £252 to own a pet, £60 to put up a doorbell, £300 to erect a fence and £108 just to make a request to alter their property.

Last year, the government promised to crackdown on unfair leasehold practices by banning the sale of almost all leasehold new build houses and making it cheaper for existing leaseholders to buy their freehold.

Gareth Shaw from Which? Money said: “We found families facing onerous clauses from developers, being badly advised by lawyers and hit with spiralling ground rents that effectively rendered their homes unsellable.

“In some cases they were ordered to pay extortionate retrospective permission fees under threat of losing their homes.

“We look forward to seeing firm action from the government to protect homeowners and ensure no-one loses out as result of these unfair practices in the future.”

What does Taylor Wimpey say?

A spokesman for Taylor Wimpey said: “We listened to the concerns and difficulties that some of our customers were facing as a result of their doubling ground rent lease terms and have taken action to put it right.

“We were under no legal obligation to do this but we want to help our customers.

“In April 2017 we announced a voluntary scheme – the Ground Rent Review Assistance Scheme (GRRAS) – that is specifically aimed at addressing concerns that have been raised by some customers regarding affordability and how easy it is to sell or get a mortgage on properties with a ten-year doubling ground rent clause.

“We have now reached agreements with the freeholders who own the leases, to enable the significant majority of our customers with a 10-year doubling lease to convert their ground rent terms to an RPI-based structure, should the customer wish to do so.

“This will be done via a legal document called a Deed of Variation and if qualifying customers choose to proceed, Taylor Wimpey will both facilitate and cover the cost of the lease conversion on their behalf.

“These agreements address concerns about the saleability and mortgageability of these properties, by making the ground rents much more affordable. We are also in advanced discussions with freeholders who own the remaining small number of doubling leases.”

He added: “All our customers received independent professional legal advice from regulated legal firms when purchasing their property and signing their leases, the terms of which were outlined simply and clearly.

“We would expect all solicitors to explain all aspects of the transaction, including the ownership structure of a property and any rent reviews to their clients.

“We are unable to comment on the advice that any firm of solicitors has provided to its client as that is a confidential matter between them.

“Regarding the freehold sale, similar to all major housebuilders on developments where homes are sold on a leasehold basis, Taylor Wimpey has always sold its underlying freehold interests.

“This is because the administrative structures needed to manage a portfolio of freehold interests are very different to a housebuilder’s core business.

“We are unable to comment on verbal information provided to a customer in relation to their freehold at the point of sale.”

Source: Your Money

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Demand for new office buildings falls as flexible working reduces need for office space

The number of new office buildings built has fallen 56% since the financial crisis in 2008, as changes like flexible working reduce the need for office space, says Lendy, one of Europe’s leading peer to peer secured property lending platforms.

Only 2,300 applications to build new office buildings were approved last year*, down from 5,200 in 2007/8.

Lendy adds that applications to build new offices have also fallen since the financial crisis – down 58% to 2,500 last year from 6,000 in 2007/08.

Lendy says that the fall in the number of office buildings being built is in part a symptom of changing work patterns in the UK.

Flexible working, for example, has lessened the requirement for new office buildings as a stronger emphasis is placed on working from home. Recent innovations, such as shared workspaces and cloud-based co-working platforms, has reduced the need for employees to have their own dedicated workspace.

Lendy adds that the drop in new office buildings could also show that the former trend towards large business parks dominated by office buildings, is fading.

Low levels of bank lending to property developers has also hampered the construction of new office buildings. Bank of England figures show that in December 2013, over £34 billion in lending was outstanding from banks to property developers, but this plunged to just £14.8 billion in December 2017.

As a result of the lack of bank lending to property developers, more and more are turning to alternative forms of finance, such as peer-to-peer, to get more projects started.

Liam Brooke, co-founder of Lendy, says: “Modern ways of working mean that offices are no longer as essential as they may have been in the past.

“Formerly, rising employment figures may have signalled a requirement for more offices. However, there is now less need for offices as employees can, in many cases, work just as effectively from home or shared workspaces.

“Demand for new offices is still out there, but banks simply aren’t lending enough to property developers to allow them to get their projects off the ground. This is why we are seeing more and more developers choose alternative finance options to fund their projects.”

Source: London Loves Business