The result is a sharp rise in both transactions and house prices. Indeed, the latest House Price Index from the Office for National Statistics showed that UK average house prices increased by 8.6% in the 12 months to February 2021, up from 8.0% in January 2021; it is the highest annual growth rate the country has seen since October 2014.
Even accounting for the stamp duty holiday, the figures are remarkable. We are, after all, still in the midst of a pandemic, yet the appetite for purchasing bricks and mortar has not been dampened by any economic uncertainty – in fact, in the current landscape, it seems people are flocking to invest in property.
A bottleneck is forming
However, there is a problem on the horizon, and businesses across the real estate sector are well aware of it. I am talking about the bottleneck that is already forming.
Simply put, thousands and thousands of people are trying to complete deals before the stamp duty holiday ends on 30 June. Homebuyers want to benefit from the tax savings, which can amount to as much as £15,000, while sellers will fear that once the holiday ends, their prospective buyers will pull out of deals and leave the market.
In reality, though, this will be the outcome for many people in the property market. Even as transactions levels have risen (they doubled year-on-year in March 2021), thousands of deals are at risk of not being completed until after the deadline passes.
According to data from TwentyCI, the average total time taken for a sale to go through the entire process from instruction to completion has increased from 184 days to 197 days (6%) in the past year. It is a concern for many – not least property developers.
Development exit loans rise in popularity
At Market Financial Solutions (MFS), we have seen a notable rise in the number of enquiries we are receiving from property developers requiring short-term loans and development exit products.
There are two reasons for this. The first is the bottleneck of transactions that is forming, which has serious consequences for developers that need to complete a sale in order to repay development finance loans they took out to fund the project in the first place. As sales are taking longer, repayment deadlines are being missed, meaning developers instead require a bridging loan so they can repay the existing facilities, giving themselves more time to complete the sale and then exit the bridging finance.
The second reason is the delays many developers have encountered in completing their projects. Covid-19 has disrupted supply chains and prevented travel, while social distancing rules have generally slowed down the speed at which refurbishments, renovations or constructions can be finished.
Again, the result is that developers are requiring development exit loans to help them complete their projects, with the eventual sale then used to repay the facility.
The original development finance loan can often be expensive. Understandably so: the lender must account for the risk involved in funding a development project that is yet to begin, and things can go wrong along the way. Further, extending a development finance loan due to delays in finalising a sale can incur significant fees.
Given these various factors, it is not surprising to see a rise in demand for development exit products – it is a trend I expect will remain prevalent across the lending sector, particularly the bridging market, in the months to come.
An interesting period to come
There is no doubt that the UK property market has a busy six months in-store, and it will be fascinating to see how certain trends unfold as lockdown measures are lifted, the stamp duty holiday deadline approaches, and the economy springs back to life.
On top of this, on 19 April the government-backed 95% mortgages were launched. Only time will tell how effective this initiative will be in enabling more first-time buyers to get onto the property ladder. But if it is indeed successful and lenders throw their weight behind it, then this scheme could further galvanise the entire property market in the year ahead.
The performance of bricks and mortar as an asset over the past ten months is something to celebrate. But that does not mean challenges do not remain – buyers, sellers and developers will all be working their way through different issues at present, from getting finance on time through to completing sales in order to repay existing loans. Lenders clearly have a key role to play in helping different groups overcome such problems, and MFS remains committed to doing so.
