Tom Short, CrowdProperty's Head of Credit, shares his thoughts on the property market over the past 12 months and expectations for 2023.

I have a slight sense of déjà vu as I pen this: a year ago, the first blog in this series opened with the purported Chinese curse “may you live in interesting times” and my second blog repeated this. Following the joys of the brief Truss/Kwarteng debacle and resulting market jolt, this phrase looms in my conscious again and seems to have sadly become a refrain. That said, none of us want to live in boring times and - given the upcoming festive period - possibly we should say that whilst there may be trouble ahead, better to face the music and dance.

Although the extent of the recent turmoil was self induced to a degree, it is important to reflect that we have had a sustained period of almost unprecedentedly cheap money and this was never going to be sustainable. I personally don’t think it was good for the economy and inevitably we were at some point going to find debt moving towards longer term average rates - albeit the move should have been more gradual and not involved the overshoot that the sudden shock produced. We now find mortgage rates coming back down even as the BoE base rate continues to increase, showing the improvement of market sentiment / common sense. And with historical rates more like 5.6%, it is probably reasonable to expect to find ourselves back at this level in the short and medium term (excluding some other geopolitical event / global shock).

Just as much as mortgage rates impact lending, the cost of living increases seen across the economy also have an impact (and consequentially on house price growth) as these feed into the affordability assessments that mortgage lenders are required to carry out. Reduced disposable incomes as a result of inflation across the economy reduce the mortgage sum that can be advanced and there are limits as to how far people can stretch themselves, or are willing to, with negative sentiment about the economic outlook. 

People still need to move and buy houses and there is, as ever, an undersupply of new stock to the market. With the ever totemic 300,000 unit target never being achieved, housing starts fell during the pandemic and this reduced supply is what is now getting brought to market. This ongoing lack of supply supports prices and with no immediate prosect of housing supply increasing, this ongoing lack of supply will likely support house prices going forward.

We did not see quite as rampant price growth as some overseas markets, where prices are already falling, but inevitably there will be some softening in growth if nothing else. Whilst it is easy for the tabloid headlines to portray doom and gloom, a small fall in house prices will only offset a part of the price growth seen during the pandemic years. For the developers we support, end values are likely to remain reasonably stable. Our regular State of the Market bulletin provides ongoing analysis of this and the key factors affecting our developers and I recommend subscribing to it.

The key to delivering projects is then having the reliable funding to complete the development and controlling costs to maintain a margin.

Just like at the start of the pandemic, this shock has highlighted the importance of having stable and reliable funding lines for projects. We have again seen a number of projects coming to us where lenders have stopped funding mid-project - putting the project, and ultimately the lenders' capital, at risk. Our diverse sources of capital allow us to more reliably fund projects whilst supporting developers with our in-house property expertise.

The cost of construction is potentially more problematic if not closely monitored and a focus for us in choosing which developments to back in the current market. The growth in end GDV values we saw in the last couple of years has helped offset construction cost increases and maintained, or indeed improved, margins for developers. With this end value growth now slowing, the get out for developers is no longer present and an attentiveness to controlling cost wherever possible is essential.

We speak to developers daily, whether looking at new project proposals or supporting projects in flight throughout the project lifecycle. This provides a wealth of intelligence both on general cost growth but also on specific products that we can disseminate and share to help our developers deliver. For instance, speaking to one of our developers this week, I found a particular brand of brick was due to increase in price a further 30% in April and was then able to communicate this knowledge further, either helping others avoid specifying the brand or advising them to order earlier to lock in current pricing.  There are a number of products still going up in price and we monitor these when reviewing new project proposals to ensure developers have a realistic and funded budget to deliver the development.

The launch of CP Capital has also provided a further avenue to support developers who have cost increases above the original budget but who have fundamentally sound and progressed projects. We can introduce junior debt to enable completion of the project and sales or refinance to occur. This supports our developers to deliver whilst also assisting completion and the payback of our senior debt. Bringing junior debt in later on in a project lifecycle when works have progressed – which generally means costs are more fixed and known, and the riskiest early part of construction in the ground is done - also provides a good risk/return balance for junior loan investors compared to junior debt at loan start.

As ever at CrowdProperty, nothing stands still and we continue successfully to expand almost exponentially. The growth of the projects we fund is matched by the growth of our team and this allows us to bring in an ever wider range of property expertise. We recently hired an ex-consultancy colleague and chartered town planner Alastair Kent as our Head of Planning, giving us greater expertise and insight in town planning matters as well as allowing us to bring this knowledge to bear in helping solve issues that arise on site.

We have also hired a number of quantity surveyors with a wealth of construction expertise. Martin Bray now heads up our portfolio management team which monitors ongoing development works - with a Tier 2 contracting background, his expertise is invaluable. Recently, for example, we were able to send Martin to spend a day on site at a project which has faced some headwinds, during which time he helped review costs and program. This is something not many lenders can offer to developers they fund and helps us maintain our record of paying back capital and interest to our investors.

Unfortunately, with some headwinds this coming year, we do expect some projects to face difficulties and will continue expanding our portfolio and recoveries teams so that we can continue investing time in successfully obtaining returns for our investors and developers. The best way to mitigate the risk of a project failure is, as always, to diversify investments so that a single project not performing only has a marginal impact on overall returns achieved. This applies not only to investors but to CrowdProperty itself and our loan portfolio. Sitting in our credit department, it is something that I know we keep an eye on. I personally, as I know a number of our team do, use the CrowdProperty AutoInvest function to ensure that the funds I invest are spread across all our projects.

Looking back over the year, there have been some particular highlights for me on top of the ongoing success of the CrowdProperty business. Whilst still working in our underwriting team, I carried out due diligence on the project we are supporting in the Brecons at Drovers Meadow. It is a delight to not only see this project progress on site but be able to recognise the achievements of the developer in building excellent environmentally rated homes by awarding them the CrowdProperty Sustainability Award.

It was also rewarding to complete this week on a new loan supporting the development of affordable housing on the island of Arran in Scotland. The restricted supply of new housing is often felt all the more acutely in areas like this where second homes and holiday use further reduce the stock that is available for local residents. We hope to support many more such developments in the future. As well as providing much needed housing, this project provides a good risk profile supported by a government grant which is subordinated behind our debt.

Other types of accommodation supported by local authority funding, such as assisted living and extra care accommodation, also provide good demand profiles and, with the covenant strength of the government, a good risk profile. This is something we continue looking to support.

I look forward to our growth continuing over the coming year as we support ever more developers in building the much needed homes our country requires whilst providing stable returns to our investors. And hopefully come the next time I put pen to paper, I will be able to come up with a more positive proverb with which to reflect upon the year to come. I wish you all the best for this holiday season and the coming year.

CrowdProperty is a leading specialist property development finance business having funded over £620m worth of property projects to date. With 250+ years of property expertise in the team, our distinct ‘property finance by property people’ proposition means that we understand what developers are looking to achieve and help those developers succeed. Apply in just 5 minutes at - our passionate team of property experts will share their insights and initial funding terms for your project within 24 hours, and go on to support the success of your project and help you grow your property business quicker.

21 Dec 2022

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