By Clint White - Head of Property Lending at Fiduciam
It goes without saying that the Covid-19 pandemic has caused significant upheaval in the lending markets, with many lenders impacted in terms of their ability to lend, particularly bridging lenders, many of which pulled out of the market for a period of time, but in the medium term the bridging market is likely to do well due to Covid-19.
In the immediate term, we have seen disruption due to some lenders being unable to lend or their funding appetites changing due to the uncertain risks during this time.
During the lockdown, new valuations have been difficult to obtain and solicitors’ response times have slowed, while some small solicitor firms appear to have shut down, all creating issues for lenders. So funding right now is difficult and likely to be for the immediate future whilst the country gets moving again.
In the economy in general over the short term, it appears we are looking at a contraction which has not been seen in the UK for centuries. The reduction in economic activity has already been compared to the Great Frost of 1709, and the bursting of the South Sea Company Bubble in 1720.
I believe that the recession is likely to be a “V” shape contraction, with a sharp increase in economic output once business gets back up and running. However, the right-hand side of the “V” i.e. the recovery, will probably be lower than the left-hand side – we are yet to see by how much.
Not all areas of the economy are impacted equally due to Covid-19. For example, whilst the hospitality industry is being devastated, supermarkets have seen an increase in sales. So what property will make for good lending security in the medium term?
Take the classic bridging for refurbishment in order to let out a property. I think that demand for this product may fall in some of the larger cities, such as London, as a number of holiday lets come back onto the market as standard rentals (due to a reduction in tourism requiring fewer holiday lets) – which will in turn reduce the housing shortage.
In general, areas relying on large numbers of foreign tourists are likely to suffer the worst so we could see a sustained impact for example, if social distancing is required long term in bars, clubs, restaurants, theatres, a lot of these businesses will fail.
On the other hand, domestic tourism is likely to rise when the government allows people to travel in Britain, so hotels focussed on the domestic market will probably outperform overall, particularly in British holiday resorts.
Where I see more demand for bridging is where businesses require funding to fit the new demand – for example hospitality businesses serving domestic tourism i.e. cafes, pubs, hotels in UK resort towns. Banks generally aren’t keen to support new businesses, so bridging finance is likely to be key here. Towns serving domestic tourism are also likely to buck the trend and see an increase in refurbishments as people convert houses to holiday lets to accommodate the additional demand in these areas.
Refurbishment for longer term lets may rise in the medium term as prospective homeowners find it harder to buy now so rent for longer. Residential property in general should hold up better than some other property classes, but not all residential is the same. Affordable residential in higher-employment areas is likely to outperform other residential. An exception to this potentially, is London prime and super-prime; my view is this was under-priced from an international perspective prior to Covid-19, so this micro-market might hold up well.
Good security for bridging loans in the medium term are supermarket and minimarket retail with good tenant covenants. This subset of retail is currently performing well, with the larger players reporting increases in sales.
Industrial and distribution businesses are also likely to perform well, particularly as retail declines. Particularly those business with modern, good quality properties and well located.
Amongst the most difficult property types is general retail. Retail has been on the decline for years, and Covid-19 will make this worse. A combination of internet sales and high rents and business rates will continue to squeeze retailers and we will see a lot more vacancies in our local high streets.
In the short and medium term, I think bridging will see more enquiries. I suspect some banks will look to leave some sectors, and so businesses will need to refinance their loans, and bridging lenders are likely to fit those gaps nicely.
The key issue for these businesses is that banks might be concerned because of poor business performance, so understanding that poor performance is short term only is important. In these instances, introducers could ensure that borrowers have a workable plan in place to improve business performance, so they can go back to the banks once the market improves.
Overall, as and when the banks won’t lend to businesses and developers, it is the bridging lenders which step in to help.