Our themes and approach to them are as follows:
Less ‘vanilla’ bridging and more development/conversions
In the past 12 weeks, we have noticed a trend of a drop-off in bridging enquiries and a sharp increase in development enquiries. We think the main reason for that has been:
• A reduction in appetite for risk by some of the core players in the development lending market.
• A reduction in the number of purchase transactions taking place, particularly in our core market in southern England, contributing to the drop in bridging enquiries.
Risk-off approach by lenders (more opportunities for us in the riskier/asset management focused end of the spectrum)
With an uncertain year ahead, mainly driven by the UK’s confirmed exit from the EU, lenders in the bridging and development space approach 2017 with a reduced appetite for risk. We expect bridging lenders to be focused on ‘vanilla’ products and development lenders to be more selective and less willing to gear up with developers. At Avamore, we like to roll up our sleeves and take on the more complex cases and will welcome a rise in more opportunistic or asset management focused deals if they materialise in this year.
Soft commercial market – an opportunity
We see the commercial property valuations being softer this year, driven by a weak occupational market until there is greater certainty around the Brexit negotiations. A softer commercial property market combined with commercial investment lenders seeking to reduce their risk may present an opportunity for the bridging market. With bridging lenders willing to refinance cash-strapped borrowers being let down by their banks, we would be motivated to add value to borrowers fighting to hold on to their investments until valuations normalise.
More regional activity – stepping away from London
Regional markets were set to outperform the London and South East markets by close of 2016 and we expect more of the same this year. JLL’s chief forecaster Adam Challis suggested prime central London (PCL) residential was likely to see 1% price growth over the next 24 months at best. In our view, we think Challis’ forecast is slightly on the optimistic side. We would not be surprised to see prices fall up to 5-10% in some PCL submarkets blighted by oversupply of product that the domestic market has no appetite (or budget) for. For the world outside the London bubble, there was quite a time lag between the London market taking off and the rest of the UK following suit. Outside of London, many areas still appear to offer genuine value for property buyers. Consequently, we expect transactional numbers in the regions to remain steady or increase slightly. For us that means we are looking to assist with growth and focus on transactions in Reading, Oxford, Cambridge, and our big regional favourite, Bristol.
Increase in BTL to HMO conversions
A recurring discussion point we have witnessed at the various property meet-ups over the past eight weeks has been a drive to convert BTL properties to HMO. The primary driver for this has been the opportunity to increase the revenue from the property through intensification of occupation. We expect this phenomenon to accelerate this year driven by the changes to taxation on personal name BTL property and the lack of available accommodation for young professionals. In particular, the drive to create ‘yuppie’ HMO sites. One of our 2016 borrowers created such a space in Reading and we expect to work with a number of such operators this year.
We expect that many of the larger bridging and development lenders to reduce activity following the UK’s actual decision to trigger Article 50. We expect a similar outcome to July/August 2016 following the June 23rd vote with LTVs reduced and pricing increasing during these periods. We also expect a reduction in corresponding transactional activity. We would hope to have some clarity over the tone of the trade negotiations by the start of the summer and with the certainty that should bring, we would expect some normality to then return to the market.
Impact of higher interest rates in the US
With the US raising interest rates, this will have an impact on the global economy. A stronger dollar will push inflation higher in the UK and that could put pressure on interest rates here to rise. In addition, an increase in the ‘risk-free rate’ may see institutional investors expecting higher returns, which could raise wholesale funding costs. These factors combined would lead us to believe that pricing will creep up slightly in the second half of the year. Naturally, as we are privately funded, this can provide an opportunity as we can hold pricing when our competitors are forced to increase pricing due to forces beyond their control.
In summary, we predict that many will take a strict and prudent approach this year. With organisations set to tread carefully following the volatile effects of political and economic changes in 2016, there will be plenty of opportunities for those in the market, such as Avamore Capital, who are rather more willing to be entrepreneurial and take a little risk.
See on Bridging and Commercial