HEXAGON INSIGHTS

UK property development finds itself at a critical juncture: the country is battling historically low housing stock, evolving environmental concerns and a shifting demographic. The country has had a chronic housing shortage for decades, and with house prices continuing to soar, one research report found that England is the most challenging place in the developed world to find a home. People under 35 – an enormous chunk of the population – are often dubbed ‘Generation Rent’. Meanwhile, in the commercial space, the COVID-19 pandemic brought a dramatic shift in how people work and how companies use office space, compounding an already drastic abandonment of high streets and town centres that have been in slow-motion for decades. Pressure on the industry is mounting: the built environment, including residential and commercial buildings, accounts for 25% of the 1 UK’s total greenhouse gas (GHG) emissions, according to the UK Green Building Council. In one light, these are insurmountable challenges facing the industry and its financial backers; in another, there are endless opportunities – including plenty of low-hanging fruit. One thing is sure: the property development market needs to take significant steps to become more sustainable. And finally, I was recently reminded about the ephebic oath sworn by young men of Classical Athens, considered a statement of civic virtue: "...My native land I will not leave a diminished heritage but greater and better than when I received it...". If they thought about it 2,400 years ago, there is no excuse not to do it now. We hope you enjoy this publication. If you would like to discuss all matters regarding sustainability, property and financing, please do not hesitate to get in touch.

Q1: As a property developer, how do I navigate the headwinds of cost inflation, rising interest rates and falling asset values? A. In these market conditions, finding the correct form of development financing can be challenging but is manageable. As we have found through our market engagements, a well-crafted pitch and a targeted financing process can unearth unexpected sources of competitive and flexible capital. We advise keeping your existing lenders close (and informed), being flexible, preparing the details well ahead of time and staying on top of the market. Q2: As a property owner, how do I deal with the increasing demands of environmental, social and corporate governance (ESG)? A. The rise of ESG is driving change in how and to whom finance is allocated in UK property. ESG compliance is becoming increasingly important, with regulations likely to impact the letting of existing stock. Investors in properties that don’t have high BREEAM ratings will need to finance capex to achieve 'green premiums' or face 'brown discounts' that could reduce portfolio values. We advise swimming with the flow. Understand what your tenants and lenders require and prioritise sustainability and social responsibility in your operations and property portfolios. Q3: As a property investor, how do I plot a course through the refinancing maelstrom? A. For investors with debt facilities maturing in the next 12-24 months, we would advocate a clear and executable strategy for refinancing and managing debt covenants to be agreed upon early with lenders. Depending on their exposure to property or wholesale funding markets, existing lenders may no longer be willing to provide competitive financing terms, so alternative sources of finance may be necessary. We always advocate strategic thinking and exploring the market early to ensure all available options are considered, including whether an element of balance sheet restructuring or new capital raising is required. Download UK Real Estate Viewpoint to find out more.