Brexit clearly represents a market shock.
The term ‘earthquake’ is not an unreasonable metaphor. It is clear that uncertainty and increased risk will prevail in the short to medium term. However, the impact of Brexit should not be confused by comparisons with the failure of Lehman Brothers in 2008, a financial shock that threatened the solvency of the banking system and triggered the credit crunch.
Brexit is political. Its impact on the economy is indirect, certainly in the short term, coming via financial markets and knock-on effects on business confidence. In a real estate context, the effects on the real estate lending market will take longer to roll out, particularly given the traditionally quiet summer period upon us.
One important issue will be how much Brexit will affect lenders’ lines of credit, with some predicting that the availability of funding lines could contract, causing lenders to pull back from lending to some degree.
That said, having repaired their balance sheets over the past few years, banks are now much better capitalised, and will still be in the business of looking to lend, so for the most part it will be business as usual.
The Bank of England has also clearly indicated that it will do whatever it takes to assist where necessary. Indeed, recently, BoE governor Mark Carney helpfully loosened the capital holding requirements for lenders, releasing a further £150bn of potential funding into the market.
The alternative lending market could be more significantly impacted as the source of monies - ie; peer-to-peer funding - will be adversely affected, if only in sentiment terms. The prospects of achieving higher levels of returns in this sector are under threat.
Furthermore, there is likely to be an increased risk profile for development lending, the sweet spot for the alternative lending market, underpinned by the residential market. The issue to watch here is how valuers react as the uncertainty over house prices in the short term begins to bite. We may see more downward valuations coming through.
At this stage, we might reasonably predict a softening in values and a challenge maintaining banking covenants in loan-to-value terms. The traditional lenders have been focused on building brand in a borrower-friendly environment with a strong sentiment of forbearance for borrowers with more challenging lends.
The outcome of the Brexit vote may prompt them to review these lending relationships. Whether this will trigger a different approach, time will tell.
Theresa May’s unexpectedly swift, unopposed appointment as our new prime minister bodes well as it gives government an encouraging head start in ensuring effective political implementation. I do not currently expect an increase in real estate enforcement in the short term. Long may this last.
Ros Goode is regional senior director in UK HQ at Bilfinger GVA and head of restructuring and recovery