Nobody can predict what the exact effect the COVID-19 pandemic will have on property prices in the UK. The market had started to see a confident recovery since the uncertainty around Brexit had lifted. But, according to Zoopla’s latest report, houses coming to market in April alone were down 0.2% compared to a 2.1% rise in April 2019.
At present, predictions vary between organisations. The Centre for Economics and Business Research (CEBR) predicts a 13% drop in house prices by the third quarter of 2020, with an even more dramatic drop of 16% predicted by the Bank of England (BoE). This will come as potentially positive news for first-time buyers, but not so much for those looking to sell their properties.
What does this mean for property developers, especially smaller construction businesses? SME construction companies make up 12% of all SMEs in the UK, with 8% of those being either micro businesses or start ups according to The Department for Business Energy and Industrial Strategy. Small businesses who are now approaching the completion of projects could face a significant drop in value of the home or homes they have been building.
Wayne Norris, who is a property developer in partnership with his wife Sheena, comments: “I have completed a plot of two-bedroom bungalows in the lovely Broadstairs. We have four properties, but so far only one has been sold. When we finished the first properties, we faced the property market crash caused by the concerns over Brexit, which led to a drop in value of £30,000 per property. Now, following the pandemic, this could have an even more dramatic effect on the value of our properties. We are lucky that the area is great for a seaside retirement home, the properties are suitable for first-time buyers or a holiday home for someone looking to escape the city a few times a year. But if the property market crashes as predicted, I may be forced to hold on to them for even longer to allow the market to recover.”
So, what is the solution? The choices are to sell at a lower value and potentially lose a lot, if not the majority, of the profit on the build; to rent out the property until such time as the market returns to a more acceptable position; simply wait until the market recovers. Fundamentally, all three options provide a financial constraint on the developer, Choosing to rent would allow for at least some income from the build, however for a developer to move on to another project this will not provide the funds required to begin the next build and keep the business in motion. Waiting months for a market to stabilise equally offers the same financial issue for the developer.
Saffron Building Society, who specialise in development finance, have today announced the re-launch of a new product that could bridge the gap between waiting for the market to return and moving on to the next project. The ‘Bridging to Exit’ loan is designed to offer developers the opportunity to secure a loan on the current value of the completed residential property. The loan will provide funds for the developer to move on to their next project and allows 12 months for the market to stabilise and finally selling the residential property at a reasonable price.
Peter Owen is Head of Development Finance at Saffron Building Society and was involved in the development of the Bridging to Exit loan comments: “The property market was just starting to really see improvement following the uncertainty of Brexit and the December election. Nobody could have predicted a pandemic would follow that would shake the country, in fact the world, as this has. All the optimism from the improving property market had led to a raft of developers kicking off new projects with a view to completion this spring. Although hampered by lockdown, many will be nearing completion of their projects very soon. With all the financial pressure of the pandemic – the loss of time and money is unimaginable – to now face a property crash on a large scale, just as properties will be ready for sale, seems like a small developer’s worst nightmare.
“We are delighted to be able to offer the Bridging to Exit Loan again, to try and ease some of this financial concern. I work closely with developers and I know the hardships they face, this situation could not have been predicted and we are delighted that we are able to offer something to keep them financially more secure for the next 12 months.”