Real Estate -
What do current market conditions mean for property investors in 2023?
After a sustained period of growth and buoyancy in the residential property market, 2022 marked the beginning of a new era.
The main financial story of 2022 was the spiralling cost of living and associated remedial interest rate rises by the Bank of England. At present, the markets are pricing in a peak of 4.8% in the Bank of England Base Rate - painful for borrowers, but lower than some predictions last autumn.
It was initially suggested that house prices would flatline in response to the shifting financial dynamic; we have however, already seen reductions in average property values. More pessimistic forecasts see a reduction of around 10% in the average price of a residential property in 2023, but much will depend on the onset of recession, the impact that has on economic activity, and how much associated inflationary cooling will follow.
Development costs increased throughout 2022 owing to supply issues and shortages. Costs were fluctuating weekly, with wood and steel increasing over 50%. This has subsequently slowed down developments as potential profits are impacted owing to a lack of downward movement on land values.
Because of a shortfall in available properties, it is expected that rental demand will outstrip stock, and rents will see an average of 10-15% increase, while some London locations could experience a 20% rise in rents.
What does this mean for property investors in 2023?
Access to funding will be a major factor for investors, with funders considering their positions and how they assess both the current and future markets. Personal guarantees and cash cover held on account as a contingency have become more common as a requirement to mitigate potential shortfalls in rental income.
We have already seen fixed rates being withdrawn in the market, and those available are now substantially higher than previously seen. Higher rates will impact the amount of debt investors can now raise, based on their ability to service interest costs and capital repayments, especially with increasing management costs.
Costs have increased at a more substantial rate than rent increases, causing potential short-to medium-term cashflow pressures.
Responsible lenders have already been assessing expected interest rate increases and have factored this into their appetite for counterparty debt levels. However, with the expectation that over the next two years many investors with existing fixed rate mortgages will see these expire, the difficulty will be refinancing debt at higher rates.
Investors should now be considering cash available to reduce debt levels - should that be required - to alleviate any potential difficulties, or even the sale of stock to partially reduce the burden of debt.
Regulatory concerns for real estate investors in 2023
In 2007, Energy Performance Certificates (EPCs) were introduced and all necessary work to ensure properties meet lawful standards is to be completed by 2025. With free cash being eroded on debt servicing, investors must consider how any remedial work will be funded. This is in addition to the difficulties observed in the market such as escalating costs and finding qualified builders to complete the work.
Overall, this is a difficult time with rapid interest rate rises after a long period of historic low rates and increased costs.
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