At a recent developers’ social and networking event in London worries about what Brexit may mean for the sector were a frequent undercurrent during both private conversations and the event’s Q&A sessions.
The long pipelines that even the smallest developments in London require means that many were conceived months before the EU Referendum.
Hundreds of these sites across the capital are nearing completion or are now looking for initial off-plan investor sales. But they are caught in the much-reported slowdown widely attributed to Brexit.
The uncertainty of it all is also beginning to gnaw away at demand for land; why buy a site that might be worth considerably less this summer than it is today? With just 37 days to go until Brexit, only big developers with deep pockets and a need for development speed and volume are still in the market, the chatter over the champagne glasses suggested.
But property market research doesn’t back this up. The data suggests that although Brexit may cause a prolonged blip in both demand and supply of homes for sale, the meatier problems are within construction and development.
Two leading property consultancies have highlighted this recently. Colliers said uncertainty and a weaker sterling have contributed to substantial increases in the cost of property development.
And Savills’ research among developers and builders also found that increasing construction costs have been putting many local contractors under financial strain, and that the high proportion of European workers within the house building workforce is worrying many developers about the post-Brexit months and years.
This is particularly true in London where half of a development’s construction workforce can often be from Europe.
Given this scenario, we quizzed two leading players in the London development market, Duncan Gunn of architectural practice Gunn Associates and Darius Ziatabari, CEO of Equinox Living, to find out how the Brexit journey is panning out.
Duncan Gunn (above, right) runs architectural practice Gunn Associates, which he created last year after leading a management buyout of his former employer, RRA Architects.
Focussed largely on developer-led residential builds his company has worked on, or is currently engaged at developments in London, Essex, the South Midlands, Northampton, Brighton and Hertfordshire.
Duncan says most of his clients see Brexit and the year ahead as an opportunity and that their greatest worry is not development, but rather how to finance their plans.
“From what I hear on WhatsApp groups and during discussions with developers, most of them are worried that Brexit is going to impact their ability to gain funding for sites and that demand for property among property investors will reduce,” he says.
“Developers do a bit of self-funding but really they are just the providers, so there is a nervousness about whether they can get the money at the right rates, which is what went wrong in 2008.
“But if they can get money at the right rates then they’re ready to really kick off some good deals and do lots of business.”
Duncan also reckons that SME developers are returning to the market, encouraged by both government measures and an increase in the number of smaller sites available at the moment.
“SME developers are best positioned to pick off the small plots that land owners have been hanging on to but now want to offload as Brexit uncertainty heightens – it’s sort of the last chance saloon for them,” he says. “Land owners often sell parcels they’ve been holding back on during times of uncertainty.”
Darius Ziatabari (above, left) is CEO of Equinox Living which specialises in Permitted Development office-to-residential ‘micro apartments’ sites mainly in London’s suburbs and commuter towns.
The company has developed and sold approximately £70 million worth of apartments so far.
He says the downturn in the London market is partly attributable to Brexit but that prices in the capital were dropping before the EU referendum vote, as the government’s ‘stupid’ housing market policies kicked in.
Nevertheless, he says prices in Zone 1 are down by 20%, and that the rest of the capital has seen house prices drop by 10% since the vote overall.
“The price range that’s seen the biggest reductions is the £1.5 million-plus house market,” he says, “but the micro-apartment market has been the most protected.
“Overall there has been a reduction in liquidity and the number of buyers.”
Darius says his company has weathered the storm better for several reasons. The first is its approach to gearing. Darius reckons that some of his rivals have borrowed heavily to finance developments at between 10% and 11% per annum and are now struggling as they wait to reach their target price, and of course eroding their profits.
“We’ve always been careful to gear ourselves more prudently and have offered investors a 50/50 split rather than bleed profits through interest payments,” he says.
“When we do borrow development finance it’s usually at about 6.5% and overall if you look at our capital stack it’s normally blended at around 4%.”
“This is a very healthy place to be if you have to wait longer than expected to sell.”
Darius says he assumes a post-Brexit ‘bounce’ of some sort will take place whether it’s hard or soft as confidence eventually returns to the market in one form or another,
“I think there could be a bounce after a hard Brexit if the pound weakens and more Chinese and US investors pile into London and the market gets moving again. Or if there’s a soft Brexit then uncertainty will be cleared among UK buyers,” he says.
“The most pressing problems are the recent changes in Stamp Duty for both prime and buy-to-let buyers.
“It might please the masses who like to see a mansion tax – but every house in London is now a mansion. Even high-net-worth individuals don’t want to pay 12% on top of the purchase price,” he says.
“Politicians aren’t commercial people and all their housing chickens are coming home to roost at the moment, on top of Brexit.”