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Date: 5 January 2023

Author: Lee Merrifield

Despite a challenging year ahead, those who plan ahead could thrive

Even the most optimistic property operators will agree that the key economic indicators for 2023 point to a challenging year ahead.

I’ve recently written another article covering the economic outlooks of 2023 which covers the ongoing cost of living crisis, higher interest rates & continuing high inflation. All of which will weigh heavily on the property sector for much of the year with property prices expected to fall and a recession also on the way.
However, it’s important in times like this we recognise that historically downturns present their own opportunities to those who plan and are well resourced. Below are some of our thoughts about how our clients can take back control of 2023 and prosper.

Developers could target mortgage-free downsizers

It’s fair to say the cost of finance will be higher in 2023 from both mortgage providers and bridge / development finance specialists whilst capital will also be a little scarcer as lenders pursue a flight to quality.

As such, understanding your market will be crucial – right product in the right location is especially important during a recession – whilst the target audience will be key. With 30% of property transactions taking place without the need for a mortgage, we expect developers to be eyeing up downsizers as the perfect target market in 2023 as first-time buyers struggle with the recent increases in mortgage costs.

Bridge loans to allow for opportunistic acquisitions

Savills are projecting a 10% reduction in house prices during 2023, Halifax 8% & Knight Frank 5% and whilst there are some differences between the three, they’re all clear that prices will fall in 2023.

However, liquid, well-resourced investors will be able to use bridge funding for further opportunistic acquisitions as lower prices – and some distressed situations – will give rise to opportunities given the longer-term prospects for the property market remain positive.

Supply vs. Demand to increase rents even further

For investors the recession will lead to lower property sales volumes which in turn will increase the number of renters in the market.

Rightmove reported there were 26% less homes to rent in Q3 2022 and as a consequence, rents are forecast to increase with Savills projecting a rise of 6.5% during 2023 as mortgage rate rises impact affordability and stifle demand amongst first time buyers.

Use of a main contractor could help to secure funding

The long running challenges around build cost inflation are expected to persist into 2023 as post Covid / Brexit issues for materials, and in many places labour, continue to impact the development sector. The last couple of years have seen property price rises largely offset the impact of cost overruns.

However, as property prices ease – and with land values still yet to feel the full impact of the downturn – developers will need to ensure they have full control over costs and therefore lenders will increasingly want to see this risk mitigated by the use of a main contractor operating under a fixed price contract alongside a strong professional team, and those that do will be more likely to secure the funding levels they need for their project.

Developers to embrace sustainability to increase values / rents

With energy prices having soared over the last 12 months the drive for more efficient homes will he high on the agenda in 2023.

Those developers and investors who embrace this in 2023 will be able to use their green credentials to boost values / rents and see them stand out from the crowd. The additional costs of delivering a more energy efficient home have often outweighed the longer term benefits but the ongoing energy crisis is starting to change the dynamics

The use of materials such as heat recovery systems and triple glazing will be a real consideration going forward and could become more mainstream for developers rather than for niche projects as has largely been the case to date. The Government are of course also alive to the issues with a number of longer-term plans to cut emissions and improve energy efficiency.

In the short term the Eco+ Scheme is due for launch in April. Details remain vague at the moment, but homeowners and landlords are likely to be able to apply for grants to improve insulation etc. Looking further ahead, the Government have also launched a consultation into having Hydrogen boilers ready for home installation by 2026.

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Opportunities for those who adapt and understand their market. The property market is constantly evolving and changing, and 2023 will be no different, but like every year – and even in tougher times like those being forecast – there will be opportunities for those investors and developers who are adaptable and fully understanding their market and where they fit within it.

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