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What could the next few months bring for the residential market?

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As the residential market begins to adapt to the impact of coronavirus, we catch up with our Managing Director of Development Finance, Robert Orr, to get his thoughts on what the next few months could bring.

What have you been seeing from lenders within the residential sector over the past few months?

At the outset of lockdown, several development lenders either paused lending or significantly reduced their appetite. The non-bank sector was particularly impacted as they struggled with their own funding lines. Challenger banks broadly kept in the market, albeit making some material changes to criteria. Paragon’s Development Finance team honoured all the facilities we had approved pre-lockdown and continued to support new and existing projects throughout. Whilst a small number of our clients were able to support their cashflow using Paragon CBILs (Coronavirus Business Interruption Loan Scheme) we did not follow some of our competition who used CBILs to lend on new development projects – that did not seem to be within the spirit of the scheme. Overall, since March we have seen some excellent new opportunities and have enhanced our reputation in the market.

How are sites functioning now? 

At the peak, we had around 25% of our sites closed. However, by the start of June, all our customers’ sites were back up and running, adhering to the social distancing guidelines. I have visited a range of projects and it is impressive to see how quickly the SME housebuilding sector has adapted.

During lockdown, we were able to process completions and monthly build drawdowns on time, as well as take new proposals through Credit whilst working remotely.

What are you hearing from clients with regards to customer demand? Is the market for new homes strong?

The general feeling amongst our clients seems to be cautiously optimistic. After a very difficult period for SME developers, many are now reporting pre-lockdown sales progressing through to completions as well as positive momentum on newly launched schemes. Pent up demand, supported by the reductions in SDLT (Stamp Duty Land Tax) and low interest rates, have given the market a boost. That said, all of our clients are mindful that more uncertain times are ahead as the economy adjusts and the Government support for businesses winds down.

Are you seeing any change in the type of scheme being proposed? For example, are you seeing developers focusing on larger homes with gardens, rather than flats?

It’s too early for us to have seen any particular change in the design of schemes from our clients as these would usually take around 6 to 12 months to go through the planning system. However, good developers will be well aware that buyers will now be more interested in aspects such as outside space, access to fast internet and a flexible layout that could accommodate working from home. That said, price will always be one of the most important factors for the majority of buyers. 

What impact has the stamp duty land tax holiday had on the sector?

The SDLT holiday to March 2021, announced by the Chancellor, seems to have stimulated demand, particularly for those looking to trade up or even buy a second home.

Negative repercussions of these changes could potentially be seen in March 2021 as we reach the deadline when these SDLT changes are set to be withdrawn. During this period, we could see a rush from buyers to complete or exchange off plan before the cut off, followed by a subsequent lull in the sales market.

How will changes to the planning process recently proposed impact the sector?

The proposed reforms to the planning process that were announced recently should help to remove the current uncertainties around planning by allocating land into three broad categories: Growth, Renewal and Protection. In the first two categories, permission to develop will be assumed in principle, subject to the scheme meeting pre-agreed design standards and requirements. This levels the playing field for SME developers who don’t have the budget to fight delays in applications like the bigger and more national housebuilders. SME developers will also be pleased to see changes to the threshold for affordable housing, thereby potentially making more sites viable.

The aim is to remove uncertainty and speed up the process, whilst at the same time ensuring standards in housing are maintained. There is still much to understand in the detail, but it is a positive first step.

What could we see in the residential development sector over the next 6 to 12 months?

The market is currently robust with positive sentiment. However, in March next year the current Help to Buy scheme is set to end, and the Government’s amended scheme will commence. This includes new regional price caps and limits the scheme to first-time buyers only. These are significant changes to a scheme that has been incredibly popular so far and adjustments that developers will need to adapt to. Alongside that, the SDLT holiday is also set to finish in March 2021 and it will be interesting to see if the Chancellor adopts a tapering approach.

Increased unemployment and job insecurity are likely to reduce the current positive sentiment, although many of these affected may not be on the housing ladder, possibly limiting the overall impact.  Those in work may actually find themselves with more disposal income and more flexibility. That, alongside low interest rates and maybe additional Government support should provide a decent support to house prices over the next 6 to 12 months.

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Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551