Davon January Update
Firstly, we hope you all had a very enjoyable and relaxing festive season and welcome to 2017.
From a Davon perspective, 2016 was a fascinating and a busy year.
Never in the company’s 20+ year history have we seen so much global political turmoil and change and with such changes there inevitably comes uncertainty.
With the top end of the property market still reeling from the SDLT changes, this further uncertainty has not helped that market recover its prior level of activity. However, we hear rumours from sources that the substantial currency change post referendum has led to some increase in transaction numbers in higher value properties over recent months – it will be interesting to see how the sector performs this year.
Further down the value range, the market is undoubtedly being supported by the continued imbalance between supply and demand combined with a continued cost of borrowing that remains at historically low levels. Indeed, post referendum, it seems inevitable that the cost of borrowing is likely to remain lower for longer than perhaps would have been the case without a vote for Brexit.
We see across our portfolio of loans that the Government Help to Buy equity loan scheme is playing a considerable role in assisting with sales, particularly for schemes within Greater London. This is positive on the one hand as the policy is clearly proving very successful. On the other hand what happens if and when the Government support for the market is removed or even just reduced?
Within the funding market, the events and resultant changes in 2016 have probably been favourable for Davon as a business. In more uncertain times, clients are even keener to have solid and professional advice as to the funding options that exist for any given project and thus Davon’s brokerage business has seen a high level of activity.
On the lending side of our business where we provide mezzanine finance for residential developments we have benefited from a greater degree of uncertainty, hesitation and in some cases a withdrawal from the market by some of the less experienced mezzanine providers.
At the same time, most senior debt lenders have re-focused firmly on lending at slightly reduced levels of exposure which has again reinforced the need for mezzanine funding. This can assist a developer to achieve a combined borrowing level that allows them to work within the constraints of their available equity or to spread the equity they have across a greater number of opportunities. This substantially increases their return on capital while also spreading risk.
As a result, we have seen our mezzanine loan book continue to grow and indeed 2016 was a positive year all round for our lending platform, Strata Residential Finance plc – www.strataplc.co.uk – with a continued flow of new investors enjoying the benefits of investing in a business that is now approaching ten years of trading and paying an attractive rate of return. In addition, investors can benefit from Business Relief allowing the investment to be considered outside their estate for IHT purposes after an initial investment period of two years.
So, the question remains with the backdrop of the UK departing the EU (well, the process at least being started!), a new US President and many political changes in Europe…what will 2017 hold?
Nobody of course can say with any certainty and with so many variables at play the next year will be full of uncertainties. To paraphrase Donald Rumsfeld “there are known knowns, there are known unknowns and there are unknown unknowns”. I for one think we will have plenty of all the above!
However, the UK economy continues to stand up robustly in comparison to all developed economies and ironically, the many prevailing uncertainties might just make the UK seem all the more attractive to global investors and corporates.
And meanwhile, at a domestic level, there is an under supplied housing market full of real people looking for real homes to live in. Therefore, we believe that the key to continued success for our developer clients is to continue to focus on the important aspects of each and every scheme.
To buy sites that allow for the development of homes that meet the demand for that location and to deliver those properties to market in a timely and efficient manner and to a high standard of finish and specification as appropriate to the target market.
We have seen through many cycles that those developers who steadfastly pursue those aims with determination and focus continue to flourish.
And we at team Davon look forward to continuing to succeed alongside our clients, established and new and to embracing the excitement and challenges that the New Year brings.
Our very best wishes to you all for a healthy, happy and prosperous 2017.
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