The saying goes that “out of adversity comes opportunity”.
Since 23 June, I should imagine that many have been contemplating what and where the opportunities are. In contrast, I have been pondering where the adversity is.
The initial shock to the system on the Friday after the referendum and the early part of the following week was just that: a knee-jerk reaction from markets and mainstream investors that were somewhat caught off-guard.
We are now in a period of abeyance, a short-term lull created by a degree of uncertainty. However, with this comes a sense of opportunity, and no more so than for the residential development market.
The underlying characteristics of the UK economy are perceived to be strong, interest rates are at a consistent low, and a weaker sterling will inevitably grab the attention of foreign investors and purchasers. However, the most prominent problem still remains – the continual significant under-supply of housing across the UK, in particular in London and the South East.
According to the Department for Communities and Local Government, only 34% of homes that were needed – 19,000 out of 55,000 pa – were built in London between 2011 and 2015, meaning a further 87,000 homes per year are required between now and 2020 to catch up. The statistics are not dissimilar for the South East and UK as a whole, a 56% and 54% shortfall respectively.
It is this shortfall and dearth of supply that will drive demand from national housebuilders, developers and housing associations. This is stating the obvious. However, what may not be overly clear is that the result of the referendum, and the subsequent ramifications and uncertainty, can go some way to at least kick-starting the much-needed increase in the construction of new homes.
One of the significant barriers to development over the past 12-18 months has been the unrealistic pricing expectations of landowners, prohibiting good-quality development sites from coming forward. As a result, there has been a tendency to “chase” the figures on a development appraisal – something that most of the time can lead to inflationary end-sale values and land prices.
Of course, many landowners may choose to hold their assets for a more certain market, but even so, it will ultimately mean that those who do bring their site to market will bring with it a sense of certainty and realism. Fewer sites may come to the market, but the quality will be better.
On the other side of the fence, developers who have liquidity, a solid and established reputation, and who can transact relatively quickly will find that they now have greater purchasing power in the market.
The perceived uncertainty will flush out the opportunistic and predatory buyers who have only acted to either frustrate genuine purchasers or artificially inflate the land market.
And while it is easy to blame the over-ambitious expectations of landowners, it must also be remembered that the unrealistic assumptions made by purchasers in order to acquire land have only served to fuel land prices.
Whichever way it is perceived, the current state of flux could well act as a filter to find genuine purchasers and authentic sellers. This should be embraced and, perversely, the uncertainty caused by Brexit can ultimately create certainty and stability in the residential development sector and be the correctional factor that has long been needed.
While many may react quickly and strongly to what they see as adversity, now is the time to deal with what has been decided. It should perhaps also be remembered that a stumble is not a fall.
James Barton, partner, City and east residential team, Knight Frank
