Associate Property Director Tom Short shares his thoughts on the property market over the past couple of years and expected trends for the year ahead.
Sitting down to write this, the purported Chinese curse “may you live in interesting times” came to mind... and 2021 (with 2020 before it) has certainly been an interesting year. But, whilst there have been challenges, overall the fundamental dynamics of supply and demand continue to drive the property market. The pandemic has only reinforced the resilience of this and opportunity for those with the skill set and drive to continue to profit from it.
Looking briefly even further back: I joined CrowdProperty just before the very first lockdown in 2020, having spent most of my working life in national property consultancies driving revenue and capital growth across a wide range of property asset classes. Having just moved into finance, going into lockdown only 3 weeks later was certainly interesting but in itself also provided the first positive affirmation I had made the right choice. Unlike most (fairly slow and staid) property firms, CrowdProperty was able to respond rapidly to keep delivering for our investors and developers alike. And, unlike most lenders, we wrote loans every week during 2020 - apart from 2 weeks at Christmas - underlying our stability. This included helping out developers with fundamentally sound projects who had been left in the lurch by lenders that stopped lending; some lenders even stopped releasing funds to projects that were already underway – an almost guaranteed way to lose money in development. Our diverse sources of capital allowed us to keep funding projects when other single source dependent lenders had to stop. And our property expertise allowed us to back only those projects with sound fundamentals, separating them in our underwriting process from projects with more fundamental issues.
Our 2021 project of the year was one such project - we had to step in to help a developer with a project in Rushden where the previous lender stopped funding. Despite having a facility in place and having released funds already, they stopped releasing drawdown funds mid-project - leaving our developer out of pocket, having already spent funds on the build they rightly expected the lender to release. The project was profitable and the developer had significant funds invested in it, providing plenty of motivation for them to complete. They just needed a reliable funding partner to help them do so. There were other challenges with working practices during the pandemic and material supply that many developers faced. This the developers faced up to well, delivering important housing for the local market and paying us back early despite the challenges which is why we voted them our project of the year. Having personally underwritten this project (and made a small pledge towards it as well), it was a real pleasure to see it progress and then to be at the awards ceremony to see two developers I had worked with get the recognition for their struggles.
In many ways, 2020 provided a proving ground for our business model with our in-house property expertise enabling us to both underwrite better (choosing the right projects to back) but also enabling us to continue assisting developers to overcome the problems that arise in construction (the everyday issues as well as the new pandemic-related ones). The application of this experience is fundamental to our 100% payback record, protecting investors but also providing greater value to developers.
2021 saw a continuation of this resilience along with continued growth in our lending, our team and the number of awards we continue to accumulate. We must be doing something right with the number of developers who keep on coming back to us with repeat projects but the external validation of our proposition from receiving awards is wonderful, especially when they place us in the fastest-growing firms not only in the UK but across Europe. And we also saw our Australian business launch and start to flourish. Closing a new £300m institutionally backed funding line which fully underwrites our facilities only strengthens our resilience but the amount of due diligence they (and other global institutional fund managers we shortlisted) performed on our business and operating model also provided me with great comfort that CrowdProperty is at the forefront of building a best-in-class lender.
Reviewing 2021 and looking ahead to 2022, there are a few themes I’d highlight that are foremost in my thinking at the moment.
The first of these I’ve touched on already and this is the fundamental market proposition of a first-charge lender operating in the residential property development market in the UK. At sensible leverage ratios with the underlying supply and demand situation in the housing market, residential property continues to be a safe investment. Provided you have the expertise and motivation to deliver the development phase along with stable funding, residential development remains a fundamentally sound investment. Our in-house property expertise sets us apart from other lenders in being able to assess the fundamentals of a development project during underwriting whilst helping developers overcome issues during construction. And our diverse sources of capital make us a more reliable funding partner than others.
One particular construction risk that has come to the fore during the pandemic is supply chain risk. In a world with global supply chains and just in time delivery, the potential disruption from situations not just in this country but also abroad and in the supply chain connecting countries is vast. And these supply chains were tested by lockdowns at home and abroad this last year. Unlike 2020, we didn’t have, for example, British Gypsum stopping production and plaster running out - but the supply chain remains under stress. This is likely to continue for a variety of reasons with the like of HS2, for example, not just buying up aggregates but buying entire quarries to supply their needs - thus taking these materials out of the supply chain. Speaking to our developers and others in the industry every day keeps us close to issues, spotting them early which enables us to then advise developers we work with to be proactive in mitigating risk. An example from last year was one of our developers who also runs a business supplying wholesale insulation to trade. He was able to advise us that whilst there was no shortage in insulation production, there was a problem with the raw materials required which were sourced from Belgium. We were able to disseminate this around our developers network, heading off a potential issue. Suppliers took advantage this last year of shortages to change payment terms for materials and this is unlikely to go back to where it was, providing another enduring challenge for developers.
I spend time every week speaking to our colleagues in Australia as they grow the business there and it has been very rewarding to be able to share the experience we have in the UK in order to enable them to scale as quickly as they are. They also provide a great cross check on the market over here, experiencing similar issues to us and providing further intelligence on global supply chains. It does come unfortunately with the downside that I speak to Aussies every week during an away Ashes series. Whilst I try to never set my expectations for our cricket team too high, the latest performance does lead to some ribbing every week.
Looking ahead, there are two themes of growing importance which we are spending a lot of time thinking about and that to a degree tie in together. These are sustainability and modern methods of construction.
Sustainability is a focus across the entire economy, not just property, but construction is well known as an industry which, because of its cyclical nature, tends to be slow to innovate and modernise practices. With legislation now driving up requirements – minimum energy performance standards in the form of EPC ratings needed to let property and the coming requirement for fund managers and mortgage lenders to assess the environmental performance of their lending book – the importance of this is ever growing. This comes not only in the form of how sustainable it is to use the end product of finished dwellings and commercial buildings but also how much embedded carbon there is in the construction and procurement process itself.
One of several new hires I have recently made for the underwriting team early next year is an experienced surveyor from a building and quantity surveying background who has a particular depth of experience in sustainable construction. This, along with our existing in-house hands-on knowledge, is enabling us to think through the practicalities of tailoring our products to enable more sustainable development and further thinking on this will be a focus for the coming year.
One of the ways to help reduce waste and carbon in the construction process is to further systemise construction by taking it away from site and into factories which brings us to modern methods of construction. We were the first lender to launch a dedicated lending product for modern methods and understand the complications that this form of construction brings - this in terms of industry knowledge but also cashflow requirement with greater front loading of expenditure. Indeed, our sustainability project of the year was a development in London which stood out as a great example of how we can deliver more sustainable housing by thinking creatively and progressively - the 2 bedroom penthouse apartment combined both airspace development and a modular build, showcasing an efficient way to densify cities with a relatively low carbon footprint.
Modern methods also provide an opportunity to try and meet the challenge of expanding our housing supply to meet government targets of constructing more dwellings each year. Systemising construction and making it more scalable must form a part of the solution to housing shortage whilst also enabling a drive to improve quality.
Alongside sustainable construction, we continue to revisit our modern methods product as technology and construction methods evolve to ensure we are able to best serve developers and play our part in driving innovation in the sector. These form just a small part of the product development going on at CrowdProperty.
Wrapping up where we started with that purported Chinese curse, it is in my experience always interesting - for all the right reasons - to be at CrowdProperty, as we continue to grow and innovate and this looks set to continue. The last year (and year before) has seen continued validation of our business model and the value it delivers to both investors and developers. Personally, I’m delighted that I made the decision to join the company and play a part in its growth - and the year ahead will see a number of new products come to market which continue to drive this growth.
CrowdProperty is a leading specialist development finance lender, having funded £370m worth of property projects. Apply in just 5 minutes at www.crowdproperty.com/apply and our passionate property experts will share their insights and our offer of funding for your project within 24 hours.
As with all marketplace lending, capital is at risk and not covered by FSCS. Past performance is not an indicator of future results. Tax treatment depends on individual circumstances and may be subject to change in future.