Stephen O’Brien, MD of Wolsey, comments on the BREXIT vote, its implications on UK residential development and particularly SME funding

“One can be clear about one thing, for SMEs operating in the housebuilding sector,  the result of the BREXIT vote has led to confidence in funding developments dropping which is bad news.

Uncertainty makes times challenging, awkward and tough.  As Britain works through the implications of its exit from the European Union, funders are facing an extended period of uncertainty. We have seen certain Credit Committees have tightened terms; the effect being that SMEs operating in the housing sector are finding funding more difficult to secure.

I’ll look at the situation in the regions in a moment, but it is London that undoubtedly faces the most onerous task in maintaining levels of growth in new home build.  The market segments where Help-to-Buy supports sales remains strong. However, in other segments, the runaway price levels and the drag of Stamp Duty continue to be strong headwinds on growth.

There are clear issues with, for example, two bedroom flats in certain London locations where prices are making them unaffordable to first time buyers, as compared to other parts of Greater London where Help to Buy at more realistic prices for the same product is making these locations affordable. Discounting is happening in parts of London where these anomalies occur. This is leading to funders with significant exposures to these markets facing up to potentially difficult situations for the first time in a number of years.  Any uncertainly and potential reduction in the interest from the international market for London product prompted by BREXIT only further heightens this concern. It will be interesting to watchhow these funders react which again will directly impact on the availability of funding for SMEs.

Whilst the devaluation of sterling since the vote may assist , there looks to be a significant overhang of future product at prices of c. £1m which is likely to impact on the London market unless confidence returns to 2014/15 levels. For example, a key issue will be the impact of BREXIT on the City.  If, as Brexiteers claim, it will be a positive one and not a negative then the overhang will dissipate.  Stamp Duty (as outlined above) remains a significant factor.  Domestic or international investors are averse to paying the levels of stamp duty sought at the best of times, let alone in a period when London may be repositioning itself in the world outside of the EU.

Outside of these London ‘hotspots’, the impact will be far less strongly felt.

The regions have not, for the most part, seen the huge uplift in prices of the South East.  This, with inherent demand for product and help-to-buy initiatives, does provide reassurance for developers that there will be a market for the right product designed for the right location that is affordable. Funding will be available from Wolsey and other lenders for those schemes.

A prime example is Wolsey’s recent funding of St Dominic’s a scheme of 23 three and four bed houses in the popular residential area of Hartshill, Stoke-on-Trent, Staffordshire, which will come to the market through Dunedin Homes & Developments, who have a reputation for providing quality and value for money.

Demand is of course the key factor here and it is why Wolsey believes the housing market in these areas will not run into recession.  The UK’s failure over the past decades to supply good new affordable homes in the sort of volume needed to keep pace with demand will underpin the future market for years to come, BREXIT or no BREXIT.

Wolsey is actively writing new business with SME’s in these challenging times.”

Stephen O’Brien, MD Wolsey, September 2016

Wolsey takes a View

What specialist finance lender Wolsey looks for in a client is real commitment and determination. “Where those qualities exist, if the proposal is sound and the experience there, a way can be found to finance it”, explains Chris Foulkes, Director at Wolsey.

Such was the case at Riverside, Hereford, a scheme with “glorious” views along the Wye Valley, Wolsey comments. The developer had found doors closed to funding and frustration growing until he met Chris. Wolsey “saw the will and found the way” and the building - with its great setting - is due for completion this summer with a high proportion of the 18 apartments presold.

Housebuilder Magazine, 2016

Positive messages for 2016

Wolsey wants to support Housebuilders and developers who want to grasp the opportunities and be part of the residential housebuilding programme the Government so much wants to see happen in 2016. The Government is stating it is opening the way for smaller developers to buy sites in England with planning permission in place. And it wants to see 40% of the new build aimed at first-time buyers. The Prime Minister is claiming it a "huge shift in government policy". To make your schemes happen look to Wolsey funding as a source of residential development finance.

Finance for Housebuilders – £2.3bn Injection from Government's Nov 2015 Spending Review.

Without considering for too long the science behind the Chancellor's headline target of 400,000 new homes, this is a time for housebuilders to be positive. The Government is stating that it wants to create an environment that will give confidence to funding residential development rather than stifle it.
This attitude and approach will influence the reforms to the planning system and local decision making to enable more housebuilding schemes to get off the ground at a pace that reflects demand.

As in any market, residential developers and their funders want to see demand sustained. So we look forward to the opportunities for starter homes and are pleased with the increase in the support for first time buyers in London, through the Help-to-Buy scheme offering interest-free loans worth up to 40% of the value of a newly built home.

The change to stamp duty from April 2016 for buy-to-let investors is an important announcement for residential developers as one would expect to see a rush from that sector of the market prior to the legislation coming into effect. In the longer term the levels of duty raised will no doubt influence how this surcharge will develop. However, after April next year, the expectation would be demand will reduce.

Funders, housebuilders and residential developers alike should generally be positive about the focus of the Government and the support for the sector through the messages coming from The Spending Review.

The value of specialist lender

Housebuilder Magazine covered this story of a Wolsey client which illustrates how, by going to a specialist financer for housebuilders a developer can open the way to successful development.

Paul Tobin MD of Riverside Construction, Hereford, knew he had a good scheme on his hands along the bank of the River Wye, but the residential development funding he required was just not forthcoming from traditional lenders. So, when Paul first met up with Chris Foulkes of Wolsey, his problems were not so much with how to create the foundations to build his scheme, but more how to create the foundations to fund it.

Wolsey knows about housebuilding. Chris himself comes from a long and successful career in housebuilding and residential development and he now advises developers looking for funding solutions. It was his experienced eye that enabled him to see the opportunity.
Picking up the story from Paul's point of view: "After 18 months talking to brokers and banks I finally met Chris on site, and with his developer's eye for the opportunity Chris could see what could be achieved on my site. No other lender had had this vision, and I finally found myself with the funding I needed. Wolsey have proved to be the development's lifeline."

Chris went to work to put together the financial package which has financed a five story timber frame that has just been erected onto a reinforced podium above the floodplain of the River Wye to create 18 spacious two bed apartments.
"50% reservations at this stage, with a completion date of Spring 2016, is fantastic and I think justifies Wolsey's faith in funding my development," concludes Paul.