Carl Davies, chief operating officer at The House Crowd, explains why affordable residential property development will be the “hot pick” in property investment after the pandemic…
Until recently, two sectors (office and retail) have formed a large proportion of the property investment portfolios of funds, family offices and sovereign wealth funds. However, some of the biggest changes to our daily lives since the Covid-19 outbreak have been how we work and how we shop. The Office for National Statistics published a summary which found that less than 30 per cent of the working population had experienced working from home prior to the pandemic.
However, since lockdown restrictions, 60 per cent of the UK’s adult population is now working from home. This is a huge shift in working practices. Many would agree that the transition has been surprisingly easy and could spell the beginning of a shift in how businesses operate. Barclays’ chief executive Jes Staley recently commented that “the notion of putting 7,000 people in a building could be a thing of the past”.
Some experts have predicted that demand for office space could fall by as much as 20 per cent. These changes will have massive implications for commercial landlords. Landsec – the UK’s largest commercial property developer and investor – has reported that just 65 per cent of its rent due on 25 March was paid by 31 March, compared with 96 per cent for the equivalent period last year.
With offices typically making up between eight per cent and 15 per cent of a company’s budget, it is logical to assume that many employers will now be looking at ways of reducing these overheads at a time when cutting costs will be of paramount importance to the survival of UK businesses. Perhaps the sector which has seen the most change is retail.
According to Barclaycard data, which records nearly half of all UK debit and credit transactions, consumer spending fell by 36.6 per cent in April compared to the same month in 2019. This marks the biggest drop since records began in 1995.
Conversely, online sales excluding grocery items grew by a massive 57 per cent which is impressive given that the average annual growth rate is 8.5 per cent. So, with Covid-19 and the change in working practices and shopping habits, where can professional and institutional investors now look for a reliable and lucrative return whilst protecting their capital?
The demand in the market now is around solving the UK’s housing shortage. We are some way off delivering the government’s target of 330,000 new homes per year. Small- and medium-sized enterprise developers play a vital role in delivering around 100,000 of these but ironically, even in normal markets they do not find funding easy to come by.
With the current crisis, many commentators have predicted a liquidity squeeze similar to 2008. Developers will have to look to alternative funders such as The House Crowd to support them. They put together innovative schemes to build affordable homes which can support the higher interest rates that the alternative finance sector charges.
The key to reducing risk and improving the chance of timely redemption of loans of this type is choosing the right locations (around economically active geographies) and sticking to economic fundamentals on pricing points. As a result, we may find that this sector starts to attract more institutional funds seeking out the returns that savvy peer-to-peer investors have been enjoying for several years now.