22 Jun A Snapshot of the Future Market Landscape
A Snapshot of the Future Market Landscape
COVID-19 had resulted in a suspension of activity in much of the market. However, with lockdown restrictions slowly being eased, it is important to consider what a post COVID-19 landscape could look like.
Residential Development Market:
The fundamentals underpinning the residential real estate market remain as strong as ever and so, this sector of the market is likely to remain resilient in the medium and long term. Government targets for new housing are consistently not being met whilst at the same time the population continues to grow and change in both demographic and societal terms. Demand should therefore continue to be strong, even if there is a temporary dip during the phase-out period. In comparison retail, which was previously on the decline is likely to suffer both from the rise on online shopping and a reduction in demand from the middle class that has seen its disposable income squeezed over the last decade. It will be interesting to see how office spaces evolve in response to new pressures and demands, with anecdotal evidence suggesting that long term office space may suffer more than short term flexible serviced offices.
In the long term, we can be fairly confident that housing priorities will change, people may seek larger homes in more remote areas as home working takes hold. With the decline of certain types of commercial properties, the emergence of the proposed ‘new build’ PDR category which will allow for a relatively quick change in use and the demolition of vacant commercial, industrial and residential blocks is likely to be popular.. Overall, this type of build is estimated to perform better in comparison to PD schemes and office conversions as there is a greater appetite for new builds which arguably come with fewer logistical challenges once the development is out of the ground and tend to provide a better end product. It may also provide new incentives to developers to increase the number and type of projects they can take on.
The Centre of Economics and Business Research has predicted a 13% housing price fall in 2020 whereas Savills has optimistically estimated that there could be price fall as little as 5% in the remainder of the year. Whilst it is difficult to predict how definitive these figures are, it is likely that there will be a short-term drop following the lift of lockdown.
A combination of interest rates and unemployment rates have historically determined the rise and fall of house prices. The speed at which house prices will stabilize will depend to some extent on whether companies decide to turn furloughing into redundancy and in which sectors. Happily, the availability of long-term mortgage finance which is generally the third pillar underpins prices seems to be relatively stable.
From a practical perspective, margins are already being squeezed and construction costs are creeping upwards. This could have a knock-on effect on pricing unless there is a reduction in land or existing building values. Most likely this will not happen, land prices will remain high in proportion to total development costs as sellers are in the main not under pressure to sell their sites. Many have become more sophisticated in terms of understanding the value and scarcity of land and are not generally willing to reduce prices considerably. This scarcity of suitable land may have a balancing effect on prices, particularly in urban areas, provided that the other three key fundamentals do not suffer too much.
The COVID-19 crisis has in many ways, accelerated the adoption of technology in the property sector. From a lending perspective, Avamore has had to be agile in embracing new ways to get deals completed, including taking borrower meetings and site visits via video calls.
The rest of the industry will be no different. From a development perspective, modular construction has been slowly creeping into the sector over the past few years and arguably it takes events like the COVID crisis to speed up new practices being more widely accepted.
Modular developers are by no means exempt from the COVID consequences but this time has indicated the benefit of using more efficient methods to build sites with clear and consistent outcomes.
Unfortunately, however, the same practical considerations which existed pre-COVID are likely to still exist as the market phases out of this crisis.
Specialist lenders in particular will still need to be confident that a high street lender will provide a residential or buy to let mortgage to a purchaser. If the Council of Mortgage Lenders are going to be able to fully embrace this method of non-standard construction, they are likely to still require assurances on the longevity and quality of the build. At the moment, and for the foreseeable future, the priority for specialist lenders will be the market recovery and servicing borrower demands for financing of traditional methods of construction. The growth of modular construction is something that Avamore has always promoted and is constantly working on in order to find practical, technical, and funding solutions that work for all parties.
The exact impacts of COVID-19 are difficult to predict. We can, however, be confident that in the short term there is likely to be a period of uncertainty that will feed into the number of sales and pricing, In the medium term any prolongation of uncertainty is likely to be directly correlated to the employment situation in the UK for the rest of the year and into 2021. In the meantime, priorities for most people who are looking to purchase, in terms of what lifestyle they need with working from home on a more extensive basis, have changed and that will shape the property landscape in the months ahead.
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