With ‘uncertain’ increasingly looking like the word that best summarises 2016 and 2017, it is starting to appear that the first casualties of the Brexit process might be complex and time consuming development projects.
Funders have already reacted to this, raising the lending margins on speculative development to their highest ever level (albeit on a low base rate). In addition, the weakening of the pound has driven up raw material costs while tighter immigration could increase labour costs for developers.
However, despite all this, the market fundamentals for development remain solid, with low vacancy rates across all commercial property sectors (indeed record lows in some areas such as retail warehousing and logistics). Urban residential land values are also rising in the UK’s big regional cities, indicating that sales values are now at levels that can facilitate new development starts.
Furthermore, while some developers may be finding it hard to justify starting schemes speculatively, others are looking at the reduction in competition as an opportunity and are exploring alternative sources of funding.
For example, we estimate that 43 per cent of large mixed-use projects outside London now have some element of non-domestic funding in place (echoing the rising interest in the wider UK market from international investors). Short-term and single-use projects are undoubtedly more fundable using traditional sources of finance, but clearly the pot is not empty if the promoter is prepared to be more creative.
Looking ahead, we expect to see continuing strong interest in the UK from non-domestic equity, as well as more schemes being facilitated by public sector involvement. Where large and complicated urban mixed-use schemes might look more uncertain, perhaps there is an opportunity for a group of developers to co-operate on design to make the project feel like a masterplanned development without the larger risks involved.
Generally, levels of speculative development activity always fall during times of uncertainty. However, the current supply/demand balance in regional offices, logistics, and even in some cases retail, means that uncertainty may well be an opportunity for some – particularly given the global hunger for the kind of long-term secure income streams that British developers are renowned for delivering.