One market insider's views on the challenges and openings for 2023
The timing and manner will have been different for each of us, but 2022 was a year of ‘penny drop’ moments.
The market saw significant change throughout the course of last year, and Martin Gilsenan (pictured), chief origination officer of specialist lender Atelier, believes 2023 will be the year that these moments will play out.
The Bank of England estimates that four million UK households will face a higher monthly mortgage bill in 2023 as a direct result of the jump in interest rates.
“For property developers and those of us who provide the finance their need to buy land and build homes, the ripple effects will be more complex and nuanced,” he said.
Gilsenan believes that, while the impact of high inflation and interest rates will bring challenges, great opportunities will also present themselves.
Interest rate environment ‘unsettling’ for the new generation
“For the generation of real estate professionals who have never known anything other than the era of rock-bottom interest rates, which began as an emergency response to the global recession of 2008-9 and then never ended, this all feels unfamiliar and unsettling,” said Gilsenan.
Economists continue to debate the nature of Britain’s inflationary problem and how high interest rates will need to go to contain it.
However, Gilsenan said, after CPI cooled in November, some are daring to hope that inflation may have peaked.
“In response, forecasts for the benchmark SONIA rate have been pared back; it is now predicted to peak at 4.57% in August, which though high by post-2008 standards, would have been unremarkable in the preceding decades,” he said.
Nevertheless, for developers looking for certainty of cost, he believes the case for borrowing at a fixed interest rate is compelling.
First-time buyers will play a critical role
Secondly, Gilsenan expects housing demand to cool as the slowing economy, coupled with reduced affordability and the end of Help to Buy, squeeze homebuyer demand in 2023.
“With Savills predicting a 10% fall in house prices over the year, an equally serious concern for developers could be a fall in transactions,” Gilsenan added.
He said first-time buyers, who are seen as key to the market, will be the most exposed to rising mortgage costs as they have the least equity; however Gilsenan added that if they stay away the whole market could get stickier.
Nevertheless, he believes improving value will bring out tactical buyers, so developers who build the right homes in the right locations should still do well.
“Understanding the sort of buyers that an area attracts, and the sort of home they want, will be more vital than ever,” Gilsenan said.
Leaner lending appetites
Gilsenan also believes that the rising cost of capital will make life harder for development lenders who lack a strong liquidity profile and a robust balance sheet.
“As a result, the market should expect to see a fall in both the volume of lending and in typical loan-to-values (LTVs),” he said.
Gilsenan said many institutional lenders are already adopting a highly cautious approach, limiting themselves to lower LTVs and reining in their lending appetite.
Meanwhile, he said, at the other end of the market, some family offices have withdrawn from development lending entirely, which he expects to see continue over the year.
This is the year energy efficiency becomes a ‘must-have’
Gilsenan believes energy efficiency will stay on everyone’s agenda throughout the year.
He said 2022’s energy crisis transformed the way the property sector views energy efficiency.
“Even with the government’s Energy Price Guarantee, the sheer cost of heating a home means that for many buyers, a high Energy Performance Certificate rating has morphed from a ‘nice to have’ into a must-have,” Gilsenan added.
On the development front-line, Gilsenan said, he has already seen agile SME developers grasp a market advantage by adapting to buyers’ increased appetite for ultra-energy-efficient homes.
What are your expectations for the mortgage market in 2023? Let us know in the comments below.
