Sweet Are the Uses of Adversity

We will never fully know if Shakespeare, when setting about writing 'As You Like It', and first coining the poignant musing embedded in this week's blog title, was 1. Thinking about finding deeper meaning in the bittersweet challenges of life, or 2. Thinking about signals for well-positioned property developers to act decisively in a market poised to correct. For the purposes of this blog, we will assume the latter, as when analysed with a long-term and strategic perspective, declining house prices can create a favourable environment for growth, profitability, and innovation as well as enhanced returns and risk-adjusted investment opportunities for all participants in our sector.

The Financial Times this week reported property asking prices fell in July, marking the steepest monthly decline on record; however, the bid data remained strong year on year. We won't see official figures on this yet as these early numbers are generated from Rightmove data that front runs the official national data set published later in the summer, but it's a safe assumption now that we may be correcting from the top of a decade-long run. The macro data still points upward, and it will continue to do so for a long time to come, but the short-term bid in the market has finally reached a point where it's healthier to stimulate the buy side. As we have discussed in the past, markets function best with limited intervention; they tend to correct themselves. Falling house prices are often viewed with concern by homeowners; however, for property developers and lending platforms focused on property development, falling prices can present significant opportunities.

One of the most immediate benefits of falling house prices is the drop in land and property acquisition costs. For property developers, the cost of land is a major component of total project expenses. When housing markets experience a price correction, land values typically follow, often leading to significant discounts on plots and development opportunities. This price easing enables developers to acquire prime or strategically located land parcels at more favourable terms, improving the economics of future developments.

When house prices fall, many amateur investors and overleveraged developers exit the market, reducing competition for land and development opportunities. This contraction in market participants favours professional, well-capitalised developers who can act decisively, such as the participants we back. Additionally, although not always immediate, falling house prices often put downward pressure on construction and material costs. As demand softens in the housing market, construction firms may experience a slowdown in contracts, leading them to offer more competitive pricing to secure work. When construction costs decline, developers can build more economically, increasing the return on investment. For platforms such as ours, the improved project economics provide an additional buffer against loan defaults or delays.

Ultimately, a healthy correction in house prices creates an ideal environment for long-term investors and developers who are not reliant on short-term market fluctuations. Savvy developers understand that downturns are temporary and use them as opportunities to plan, build, and position themselves for the eventual market recovery. We align ourselves with these participants to support the best quality projects, driven by fundamentals rather than speculation. In essence, falling prices help weed out short-term speculation, leaving behind solid, long-horizon opportunities that are better suited to the business models of everyone in our sector. It makes us a stronger proposition.

Booming housing markets, such as the one we have seen in our post-pandemic environment, often result in inflated property valuations, which, as we have experienced, distort development appraisals. Correcting prices brings valuations back into line with fundamental metrics, such as income, yield, and affordability. These elements are our bread and butter, as we only fund developments based on realistic end values. This approach has mitigated the risk of being overexposed to market volatility, ensuring capital preservation and steady returns.

Finally, correcting house prices enables platforms such as ours to position ourselves counter-cyclically. While traditional lenders may retreat during downturns, we, as always, can and will fill the gap, supporting development when it’s most needed and securing better returns due to higher demand for alternative finance. A countercyclical exposure for investors, diversifies investment portfolios beyond public equities and bonds, allows them to access higher returns during periods of low growth elsewhere, and provides much-needed liquidity to developers when banks are cautious.

Perhaps to make one final comment of the two Shakespeare quotes lined up for the title, we could have just as easily said "nothing comes from nothing" to accentuate the importance of not being paralysed by headlines around the housing market and to take these opportunities if you are sitting on the sidelines. However, unlike 'As You Like It', 'King Lear' was a tragedy, and this situation is far, far from that.

Invest & Fund has returned over £300 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.

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