The property market has been hit by a series of difficulties that together have created something of a perfect storm for investors.
- The rise in stamp duty on second properties
- A general fall in property values
- An outlook that includes higher interest rates
- Brexit uncertainty that has put lenders off investing in the property market
- The regulatory mandate that lenders must stress test borrowers at interest rates of 5% or higher, and
- The effect of universal credit on rental yields.
These factors taken together mean that things have become a lot harder for property investment companies. Properties are selling for significantly less than owners’ expectations, up to £50,000 less in some areas outside London, and the selling process is taking much longer than in recent years.
Company growth is being restricted by a tightening in lending policies. This means that companies are unable to take advantage of the opportunities in the market given the softening of property prices. Cautious lenders are demanding ever more security to provide a buffer in the event of further falls in property prices.
The adverse market factors are leading companies, and their investors to feel a lot more exposed especially when directors and shareholders have given personal guarantees of company borrowings “All monies clauses” in lending documents. This will cause even greater concern that security for one borrowing for one property turns out to include all borrowing from that one lender.
It remains to be seen what effect a hard Brexit, a soft one, or any variation thereof, has on the market but one thing is clear, the outlook for interest rates is upwards and the squeeze will therefore continue.
Directors and investors would well be advised to look closely at their personal as well as their company’s exposure.