Building in the age of uncertainty

After the latest election, political uncertainty now appears to be the ‘new normal’. There have been major votes every year since 2014; each with the potential to radically alter British politics and the economy. We’re now left facing two years of Brexit negotiations with a weakened government and a hung parliament. Not exactly strong and stable.

In the property sector, there’s been a revolving door of housing ministers – 15 in the last 20 years – bringing rafts of new policies, white papers and new home targets which never seem to amount to much. But should developers really be worried about the political turbulence? How are the Brexit negotiations and the election result likely to impact the property market?

The evidence from the whole market so far paints a mixed picture. Looking at the latest ONS data, house prices are up 5.6% annually – still rising but at a slower rate than before. Home sales have slowed, but are still higher than in 2013. If we just look at combined figures for the entire sector, it seems property is as uncertain as politics.

However if we look at different types of home buyers, we can see how the political unknowns look set to shape the market. The fate of property developers over the next few years will really depend on what they’re building. For those building homes people want rather than homes they need, the future looks bleaker. Potential buyers considering a move because they would prefer a better view, a bigger garden or to live in a more desirable location may decide not to take a risk and stay put.

We can see that the top end of the market is already struggling, as wealthy buyers have adopted a wait-and-see attitude. The latest Knight Frank research shows house prices falling 6.6% year-on-year in prime central London. This trend looks set to continue as Brexit may lead to a reduction in richer foreign buyers looking to move the capital. For developers building luxury property, the next couple of years may be more challenging.

It’s not just the high-end property market that could be impacted by the political upheaval. The latest ONS construction statistics show a 1.1% decline in new private housing quarter-on-quarter, yet orders for new homes are up 1.1% over the same period. This suggests there is a growing demand for new homes, but more projects are getting held up in construction. The political uncertainty is making the process of building homes more costly and harder to finance. High street lenders have adopted a more cautious approach, while rising inflation and the falling value of the pound had made materials more expensive.

For developers struggling to fund their projects to completion, mezzanine finance can provide the much needed leg up. It helps fill the funding gap between the equity developers have established and the amount of senior debt that banks are willing to provide and, as is often so important in the case of construction projects, decisions can be made quickly.

But the pertinence of political uncertainty to the housing market shouldn’t be overstated. Very few people will move home or change plans because of election results or political shifts. Most buy a property because of a major life change like getting a new job or starting a family. These life events will still happen regardless of the political situation, ensuring there will always be a demand for homes. When combined with the chronic shortage in the supply of housing stock, house prices should remain relatively stable over the next two years.

The key to maximising success for developers in the next couple of years will be to build properties which will always be in demand. Young people will still aspire to get a foot on the ladder. Students will still need homes to rent while at university. And new families will still want a home near a good school. It’s not all bad news either. The uncertainty provides a couple of silver linings for developers. Property may be a safer investment than other assets when the economy is so shaky. The decline in the value of the pound could also make homes in the UK more appealing to foreign buyers, counteracting the effect of Brexit. But it’s still important to diversify risk. Partnering with mezzanine lenders often allows developers to not only reduce the equity contribution required, but also enables them to spread the risk over multiple projects and considerably enhance the percentage return on equity invested. Billionaire investor Mark Cuban has argued that wherever there is change, and wherever there is uncertainty, there is opportunity. That’s certainty true of the property market in the next couple of years and mezzanine finance can help developers to make the most of it.

Paul Markovitz is director of Argyll Property Partners