Paresh Raja, CEO, Market Financial Solutions, talks about the rising popularity of development exit products.
The performance of the property market during the pandemic has been remarkable. Yes, the stamp duty holiday has been in play since July last year, but the sheer level of demand we have seen from homebuyers in spite of wider economic uncertainty is extremely impressive.
The latest House Price Index from the Office for National Statistics illustrates how the high levels of demand we are currently seeing among prospective buyers is driving up prices at a significant rate. 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.
Evidently, the UK’s love affair with property has not been adversely affected by Covid-19. In fact, the wider economic uncertainty caused by the pandemic might actually be leading more people towards purchasing bricks and mortar.
A backlog of transactions is forming
That being said, we cannot escape the fact that a bottleneck is likely to form in the coming weeks, with many transactions at risk of not being completed before the stamp duty holiday deadline. Many buyers are being let down by mortgage lenders – even in cases where a mortgage in principle has been agreed – and it is likely that this issue will become more prevalent between now and the end of June.
The stamp duty holiday ends on 30 June. And in the weeks to come, thousands of buyers will be trying to complete on deals before the deadline passes, ensuring they do not miss out on the tax break (which can save them as much as £15,000). Unfortunately, many transactions will not be completed in time.
According to recent analysis, the total time it currently takes to sell a property – from initial listing to completion – sits at an average of 295 days (ten months). The stamp duty holiday is exacerbating the problem, with many lenders and legal firms struggling to meet the huge surge in demand.
This is a problem that will affect buyers and sellers alike. And property developers form one group that Market Financial Solutions (MFS) has seen struggling as a result of the backlog in transaction.
Development exit loans rise in popularity
If it takes longer and longer for sales to be completed, property developers could suffer. After all, property developers typically rely on development finance to fund a project – a loan to cover the costs of building or renovating a property. This loan will then be repaid upon the sale of the completed property, but when the sale stalls, deadlines for repayment can be missed.
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.
That is why MFS has seen a notable rise in enquires for development exit loans. A short-term development exit loan can be used to repay the existing debt, which in turn will give the developer more time to complete their project, sell the property, and then repay the bridging loan. And to my point above about costs, a development exit loan can often have more competitive rates than the original development finance loan – by replacing the more expensive debt with a more affordable one and avoiding extra fees, the developer will protect their profits upon the eventual sale.
Outlook for the market
Looking to the coming months, there is no denying that the property market is entering a very interesting period.
The stamp duty holiday ends on 30 June. But of course, the tax rates do not immediately revert to their usual levels – there is a staggered approach through to September, with savings still on offer for prospective buyers. This, combined with the backlog of transactions that will still need to be cleared after 1 July, means the summer months should remain busy.
On top of this, on 19 April the government-backed 95% mortgages were launched. It will be fascinating to watch how effective this initiative is in enabling more first-time buyers to get onto the property ladder. If successful, this scheme could further galvanise the entire property market in the months to come.
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.
Paresh Raja is the founder and CEO of Market Financial Solutions (MFS) – a London-based bridging loan provider. Prior to establishing MFS in 2006, Paresh worked as a senior professional consultant in one of the top five management consultancy firms, and also set up an independent investment group.
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