Changing markets are shifting investor attitudes

We are sharing the findings from our survey with Property Week readers for the first time because they show a real shift in attitudes among developers and investors towards minimum required returns, risk and capital structures.

Much of this is driven by new tax legislation and government initiatives, coupled with the impact of continuing appetite from overseas for UK property investment.

But the changes inherent from the poll among clients controlling portfolios worth billions of pounds are also intriguing, mainly because they reflect a market that is changing in sentiment almost month by month.

The competitive environment in London and the South East is driving developers to take more inherent risk than in previous years.

Some assume they will be able to exit a development at greater prices. Some are taking on greater planning risk. Some are buying in unproven locations. And some are just borrowing more money.

For these reasons, our poll showed that developers are keen to enter more joint ventures to mitigate risk, helping them to spread their capital more widely. Joint venture structures also allow developers to benefit from separate accounting treatment for different projects, which can be beneficial for smaller developers. Overall, joint ventures work best in the current market when each side brings a separate skill to the table.

Our client survey also told us that residential developers are increasingly keen to enter into joint ventures with registered providers and construction companies. Again with risk in mind, both sides benefit: the registered provider gains access to new residential stock and shares the wider proceeds of a development including the sales of upmarket homes. The residential developer achieves a forward sale of the affordable element to a partner on day one of the project, and can therefore achieve more favourable debt terms.

By forming joint ventures with construction companies at a time of rapidly rising costs, developers are now getting their interests more closely aligned with contractors, translating into more efficient procurement and lower build costs.

From a banker’s perspective, we may prefer to provide debt to a joint venture in the current market. This can give us extra comfort should conditions become difficult.

Investec’s client poll also found that more and more clients are actively exploring opportunities arising from permitted development rights, from offices to residential. Although some developers are now reverting to office use rather than converting to residential, as more offices are taken out of supply, for many properties conversion to homes is their only viable future use.

Many of our clients who see no value in prime central London residential development are turning to peripheral locations in the capital where office buildings can be converted into homes with good commuter times.

With the central London market considered to be overpriced, stamp duty land tax at a maximum 15% and overseas buyers still chasing up the value of sites, pursuing conversions through permitted development rights is one of the few options open to some of our clients.

Overall, our poll found that developers and investors are still keen to find opportunities - but they are more aware of the growing risks involved in property today. As a bank, we too are still keen to lend - to the right clients on the right terms.

Hayley Scott is responsible for real estate origination and structuring at Investec