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The shape of recovery

Michael Dean Avamore Capital

Michael Dean is a principal at bridging and development lender Avamore Capital

Almost three months after the UK was officially locked down we are seeing activity pick up. COVID-19 shook the market and we can expect that however the industry settles, it will look very different to the pre-COVID era.

Some sub-sectors will benefit from a slow and steady recovery, whilst others may never really bounce back.

Take a look below at some of the key themes which could emerge in H2 2020.

Is it going to be a year of two halves?

2020 is unlikely to be a clear-cut year of two halves; it is more plausible that we will see four different periods.

We got off to a relatively good start following political certainty at the end of 2019 and a long-awaited Brexit agreement almost a month later. Therefore, we experienced a short-term uplift in positivity before COVID-19 and the lockdown hit; that was the second phase to 2020.

We are starting to see signs of a recovery period emerging, and whilst we are quite far off of a completely COVID-free era, we will see a pick-up in activity in the months ahead as developers face increasing pressure to complete their sites.

Nevertheless, once the market begins to navigate the new normal, we will probably be well into the second half of the year.

At this point, a Brexit deadline will be on the horizon and there will be an increasing chance that Britain will end up with a ‘no deal’ agreement at the end of the transition period.

Furthermore, the furlough scheme will be coming to an end, and if the result is a notable increase in redundancy, Q4 2020 will bring about a new set of challenges.

What are the big challenges or opportunities?

At the moment, institutional lenders that fund the specialist finance space have much less of a risk appetite.

Therefore, as we head into Q3 2020, there will be big opportunities for those that are more willing and able to be involved in the value-add space in specialist finance.

Whilst there has been an easing off in terms of the volume of transactions, we are still seeing relatively strong funding demand for ground up development projects, those that can step in and support will prosper this year.

In addition, there will be an increasing number of people stuck with unfinished schemes as development finance providers look to be repaid or have their funding lines scaled back, and so there is a huge opportunity for a lender that supports developers specifically in their 2020 challenges.

What shape is the recovery going to be?

The recovery is unlikely to be V shaped, because of the slow phase-out period and the expected refocus on Brexit towards the end of 2020. Those that are optimistic will predict a U shape, and pessimists will expect it to be L-shaped.

Most likely, we’ll see a slow and gradual recovery period as the industry gets to grips with the ‘new normal’; social distancing measures (even at one metre) are likely to be in place for the foreseeable future, which will further impact development schedules that have already been delayed. There will be difficulties around supply chains and cash flows for everyone, and so it is likely that the market will need to take some time to adjust and scale up on activity.

Which sectors will be hit hardest, and which will recover the quickest?

The COVID-19 crisis has accelerated some of the themes that we were already seeing. Retail was on a steady decline and the recent restrictions mean that we may soon consider most A1 retail to be a thing of the past.

An interesting space to watch will be restaurant property, which has normally been relatively resilient to economic changes. Chain companies that can no longer service their debt are likely to go into administration, restaurants within retail property will suffer because of the changes around them and, even in the best locations, restaurants will face challenges if the public do not feel comfortable sitting in a crowded environment.

Additionally, offices are undergoing a structural change similar to that which we saw with retail around 10 years ago. It is difficult to predict what the long-term impact will be – offices will always be necessary, but the primary function will change from being a place where people work, to a base at which teams will congregate.

Office configurations could change, with businesses prioritising private meeting rooms and more break-out space instead of more desks, or we could see a rise in demand for serviced office space on the outskirts of the city with people preferring to work away from home but not being prepared to for long train commutes.

Finally, the hotel industry may bounce back relatively quickly. Travel, whether within the UK or opened up abroad, is something that many people missed during the lockdown period. A change of scene could be welcomed by most, and there is potential that people may quickly forget about the impacts of COVID from this perspective.

Which are best placed to ride out the storm?

Looking at a direct real estate perspective, if home working takes hold, it will increase the value of residential real estate further.

As ever, location will be key, city centre properties close to amenities will continue to have strong demand and those in more rural areas with good transport links are likely to become increasingly attractive as fewer people are obliged to work from their offices.

Flats in neighbourhoods which fall outside of these brackets (for example London tube zones 3-5) are the ones which may struggle, being far from the city without the benefit of rural surrounds is not likely to provide the most attractive combination.

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