Summiey Khan, part of the real estate team at Axiom Stone Solicitors, discusses some of the effects of the pandemic on borrowing in the property market.
The UK has seen the biggest quarterly economic contraction since the financial crisis in 2008 – affecting almost every sector, especially the property market and it is anticipated that the GDP will fall much further in the third quarter of 2020.
Just as we have seen in the stock market, many new, inexperienced ”low-information” investors are entering the market to take advantage of the potential opportunities in the continuing crisis. As a result, the trend is that their loan book consists of very-high-risk loans with an increasing inability of their borrowers to pay the interest or redeem their borrowings.
The property market has adapted somewhat effectively in light of the Government’s guidelines. Some lenders are happy to undertake more automated and desktop valuations with solicitors able to advise via video calls and existing loans are being extended.
To cope with the current climate, lenders have reduced the loan-to-value ratio and are implementing stringent and stricter due diligence on borrowers, as well as assets. We will, inevitably, see a shift in negotiating power from borrowers to lenders as many “newbie” lenders will be withdrawing from the market. This will result in fewer available products.
Most lenders will have experienced falls in revenue and many will continue to face real cashflow problems. This will then have a domino effect on landlords and developers. What we have seen with our developer clients is that they are required to inject more equity into each project and provide further security, such as an increased amount for personal guarantees. This impacts heavily on their expected profits and ability to secure further development projects.
Analysts are hopeful that the market will bounce back and there will be a spike in activity for first-time buyers, developers, business owners and portfolio landlords. We can hope for the best.