30th November 2022
At Martin’s Properties, our strategy continues to evolve and adapt to the ever-changing headwinds and challenging economy that the property industry faces. Against a backdrop of news of recession and reports out this week, which showed that in Q3 this year the UK real estate market suffered its worst quarter since 2009, we look to explore what opportunities will arise from price adjustments across the board.
Our development activities have been necessary rather than discretionary of late, but the market dynamics as they stand have turned our focus to development opportunities. To discuss the issues facing the development sector and shine a spotlight on the opportunities, we invited a panel of industry experts to join us alongside CoStar’s Paul Norman, who expertly chaired the discussion.
Whilst adversity does create opportunity, access to finance is paramount to capitalise on any readjustments. As a business we, at Martin’s Properties, fund our developments through our cash reserves. We have recently re-financed to give us a competitive advantage in acquiring sites. As residual prices come down and construction costs stabilise, we expect this to translate to positive returns worth the risks involved. Where we have provided debt to developers, we look at loans on a case by case basis and assess. If all does go wrong, is this an asset we would want in our portfolio?
Industry colleague Nick Hornby from Marchmont is actively in the market for a large loan in the region of £150m and hasn’t seen banks being put off by September’s disastrous mini budget. However, he has seen a switch from senior lending to funding based on equity financing. He notes that the institutional market for development has seen a big shift in yields. Hornby believes that once a confidence in the new norm arrives, we will begin to see some form of ‘business as usual.’ Looking through the lens of home ownership, Form + Build founder Mary Hurst is seeing a significantly changing climate. With borrowers finding the finance market much more challenging, and loans slower to materialise with tighter conditions. Hurst thinks this will translate to a correction in pricing in London, but a greater price impact in areas away from significant transport hubs and infrastructure. For residential developers, those in the build completion phase will need excellent design and product to entice buyers and sell their projects. To therefore realise their gross development value in a challenging market. Hurst believes in such a market there will be some great buying opportunities”.
Nick Keable from Development Intelligence believes that the difference between the recession that we face now and those in recent years is that the development industry has built up a resilience to recessions. “Whereas everyone downed tools following the GFC, our clients now roll their eyes and crack on, they aren’t worried about this recession, it’s the next one.” Keable did concede that his clients without funding in place were finding it harder.
Mike Bull from Academy Consulting agreed that the resilience factor is huge now. He comments that enquiries for his cost consultancy services haven’t been affected yet, and that now more than ever there is a big opportunity within development to get the right contractors onto jobs aligned with a carefully executed cost plan. A gloomier picture is painted by Sarah Brown, from architects Tate Hindle, who says that she is now seeing a small number of projects being put on pausing as funding, which usually falls into place during planning, is becoming increasingly difficult for some clients.
Despite financing challenges, the greatest hurdle for developers was viewed by the panel as local authorities and planning departments. It was widely viewed that the lack of resource and skill in these offices has created unprecedented waiting times for approvals causing a knock-on effect to budgets and forecasts. Keable cited that this was also a huge problem in national government with an ‘on the bus off the bus’ approach to housing legislation. Hannah Barter a planner from Urban Vision Enterprise CIC struck a more positive note with the view that “every negative can be turned into a positive. We are seeing a commitment to the levelling up agenda. And in areas where there is certainty authorities are looking to work with investment partners. A key opportunity for developers, where there is certainty, is where they can help local authorities meet their local climate targets.” Barter also welcomed the new planning codes which focus on ensuring that future developments work with the architecture of an area and an end to “anywhere-villes”. Hurst and Hindle agreed and suggested that the surest way to surmount planning challenges is to present a diverse range of options at the pre-ap stage and work in areas where authorities are encouraging of development. Barter noted that where she has found success with planners is through the new Class E use change, which comes with prior approval, where developers have used the Class E to their advantage and used the use change as a bargaining tool with planning officers.
Keable is less than enthusiastic about the prospects of other governments being able to make any greater impact than reappointed Michael Gove, as “planning reforms don’t win elections” and most governments will have to walk the very thin line between appeasing the red wall with development and infrastructure improvements and placating the blue wall who don’t want housing. This view has been reinforced by the Chancellor’s latest fiscal statement which whilst big on business rates, investment zones and devolution barely touched upon planning.
Alongside the governments levelling up agenda, of which only 5% has been spent to date, the environment and green targets are forming a huge part of the real estate landscape. Brown noted that whilst large landlords with a big footprint such as The Crown Estate and Grosvenor are getting ahead, it’s believed only 15% of London offices are achieving an EPC A or B rating. A further 70% of these offices will have to be upgraded to achieve the Mayors net zero carbon by 2030 “it’s thought that some properties will almost certainly have to change hands to an owner with an appetite for upgrading.”
At Martin’s Properties we are looking to make sure we are ticking all the boxes as part of our ESG commitment, noticeably it is not a huge amount more that we have to do to make an impact. When appointing suppliers we ask for the same commitment from them. In terms of development there is a risk of a misguided approach to achieving BREAM and WELL accreditations, knocking down an existing building to achieve a better EPC rating is not environmentally or socially friendly. We have strong policies and an ESG dashboard in place which look at the picture as a whole and the carbon life cycle of buildings and everything that goes into them. Hurst agrees on these points and stresses that it’s down to developers to take a long view on energy costs and alternative energy. “At the end of their life cycle photovoltaic panels cannot be recycled and will end up in landfill”.
To conclude our discussion we asked our panel where they see room for optimism and opportunity. Hornby is more optimistic than most and cited live case studies in Peterborough where he is having development success alongside a progressive planning department. This is in great contrast to other areas where “there is no impetus which is bringing projects to a standstill.” This is something that we have witnessed first-hand at Martin’s Properties, and it shines a light on a bigger issue of how you attract more entrepreneurial individuals into planning departments. Hornby, Hurst and Bull all welcome the stabilisation of construction costs and raw materials. This coupled with a dwindling pipeline for contractors was also seen as an opportunity for developers. Hornby is also hopeful that the “negative press around market sentiment reaches landowners who might start being realistic on their pricing” and sees town centre offices and selective shopping centres as sectors that are ripe for development as prices soften and the construction environment steadies. Hornby is optimistic about second tier city locations. “In these second tier locations it doesn’t take a huge amount to push on rates. Equally some centres such as Bristol are probably undervalued, residential rents are affordable and there is good demand.” Barter is positive about what she refers to “the duck belt’ across central England where the regional inward investment and infrastructure improvements in cities such as Nottingham and Stockport have created opportunity for developers. Bull thinks schemes that are attractive to contractors will do well in the current environment. Whilst Hurst sees opportunity in meeting the desire for so many Brits who want to get onto the housing ladder and states that “key forensic work will ensure willing supporters and backers of the right projects.” Hurst also believes that there are still pockets of opportunity for turnaround projects around the Elizabeth line.
Looking back to 2008, this certainly does feel very different, there isn’t the supply overhang. As prices fall and costs stabilise I believe there is indeed room for opportunity. We are actively seeking development opportunities across all sectors where we can utilise our cash reserves and add value through our highly skilled in-house team.