It is important for would-be investors to understand the role the property cycle plays in lenders’ credit risk processes. Andrew Turnbull (pictured below) explains the Wellesley approach…
THERE ARE TWO things that Brits are supposedly famous the world over for being obsessed with – the weather and property prices.
This summer, there has been plenty of opportunity to talk about both – the holiday heatwave being balanced by a decidedly chillier turn in house prices, at least in London and the South East.
The government may still be falling substantially short of its target of 300,000 new homes a year, but overall housebuilding statistics do not give an accurate picture of the variation in the market, both regionally and in terms of value.
All of which makes it especially important, says Andrew Turnbull, co-founder and managing director of alternative finance property lender Wellesley, that potential investors have a good understanding of the property cycle and its potential impact on their returns.
“There are many different views, but the most widely accepted one is that a cycle normally lasts eight to 10 years and that it describes how the prices of the entire British property market fluctuate over that time,” he says.
“It’s the process by which you see property go through a boom in pricing, the inevitable recess afterwards followed by stability and then the repeat of the cycle.”
The key influences, he adds, are supply and demand, and conditions in the wider economy. So rising interest rates, falling consumer confidence and shifts in mortgage provider sentiment can all have a big impact. “The global financial crisis was the trigger for the last significant fall we saw in 2007-2008,” he explains.
For lenders – and investors – in property development, how much a house is likely to be worth once it has been built is a key part of making a successful loan. But the property cycle is very hard to call at present, according to Turnbull.
“Something that makes it challenging to define where we are in the cycle right now is the amount of government intervention we have seen over recent years,” he comments.
“Quantitative easing has kept interest rates incredibly low. Help to Buy has provided significant support at the lower end of the market, while stamp duty increases have hit prices at the upper end. These are significant policy changes that have been made for good reasons, but they distort the market and interfere with the normal property cycle.”
The key to managing these tricky conditions, says Turnbull, is to seek out the parts of the market where decent returns can be made, whatever the economic weather. And that’s precisely what Wellesley does.
“Affordability is key for us, we look for where the demand is not being serviced and where the greatest stability is to be found,” he states. “Areas which we think will perform the best in any given climate.”
That means providing development loans ranging between £10m to £20m to underserved medium-sized builders, not for luxury flats sold off-plan to speculative investors but rather “houses that the everyday man and woman can afford”. These homes are typically outside the capital in cities such as Manchester, Birmingham and Leeds, selling for £200,000 to £350,000 once completed.
Overall it’s an approach which unites lenders and borrowers by achieving positive results for all, says Turnbull.
“We bring together investors who can’t get the returns they hoped for from a bank and developers who are frustrated by banks that don’t really like to lend to smaller firms,” he affirms. “The result is sensibly priced housing in parts of the market that really need it. We think that’s an attractive financial and social outcome.”
Click here for more information on Wellesley.