There’s an old adage in the investment industry that says, it’s not about timing the market, it’s about time in the market.
Those of us in the property world know this only too well. Residential development is a long-term play, risk is based on serviceability, asset values and cost of funds.
Yet the macroeconomic environment does have a material impact on investment decisions. Returns must stack up, and rising rates over the past 18 months, along with elevated building material costs, has made that balance finer.
There is a temptation to hang fire, to wait for things to improve. But should you?
The Bank of England is becoming less hawkish, with its governor Andrew Bailey potentially opening the door to the first rate cut in June, stating the news on inflation is “encouraging” in a statement accompanying the Monetary Policy Committee’s decision earlier this month to leave interest rates as they are.
Consumer Price Inflation is now at 3%. It rose by 0.3% in April, compared with a rise of 1.2% in April 2023. Residential property values have held relatively steady in most parts of the UK.
Rightmove data showed the average asking price of property coming to the market rose by 1.1% between March and April, with the annual rate of price growth now +1.7%, the highest level for 12 months.
Buyer demand is holding up. The number of new sellers coming to the market is up by 12% compared to this time a year ago, and the number of sales being agreed is up by 13% as both seller and buyer activity rebound.
Supply is relatively subdued still. Office for National Statistics (ONS) data showed new-build dwelling starts in England were estimated to be 19,080 in Q4 last year, a 10% decrease when compared to 2023 Q3 and a 51% decrease when compared to 2022 Q4.
Partly, that was driven by regulation demanding costlier energy efficiency standards in new build from Q3 last year. High construction material costs also weighed on development returns.
That tide has turned, however.
Construction materials prices fell by 2.3% in the 12 months to March 2024, according to the latest figures from the Department for Business and Trade, this was a bigger decrease than the 1.9% drop seen in the year to February 2024.
Earlier this month, Bailey hinted the Bank of England could move to cut the base rate before the US Federal Reserve brings rates down, with markets now pricing that in.
Because of the way we price our development finance, modelling rates based on the SONIA curve rather than a simple assumption that Bank of England Base Rate will remain static over the course of a loan, we are already able to afford borrowers some of that upside.
It also means we can assist developers whose strategy has always been to contribute a lower cash equity amount to kick off their projects now.
Even with tighter margins recently, we have remained active in stretched leverage development finance, facilitating up to 70% LTGDV, higher than market norms and in some instances for repeat borrowers, even higher.
On the other end of the spectrum, we also recognise those developers who are in a privileged position to contribute larger equity amounts and are seeking lower pricing, particularly for BTR and PBSA schemes, where they need the serviceability to comfortably work. In these scenarios where we can get the Net Debt Yield to an investment grade level, we are pricing interest margins from as low as 3.15%.
Our clients don’t need to time the market because they see opportunities are out there and now as ever, our finance options are tailored to continue to support them.
Mario Ioannides is partner at Pluto Finance
