As a new decade beckons, Whitehall Capital reflects on a challenging year for bridge finance lenders and the broader real estate market, and dusts off its crystal ball.
Reflecting on 2020
Restrictions imposed under the second wave of the pandemic have made for a slower and more challenging market, with heightened uncertainty raising anxiety levels amongst borrowers and developers alike.
The specialist bridge lending market has shown remarkable resilience regardless of the ongoing certainty around Brexit and COVID throughout the year; finance has been readily available and bridge lenders have been active, with traditional lenders adopting a more cautious approach.
However, with valuers continuing to set prices on the high side, and office rents holding up against best expectations, it has been difficult for lenders to determine real value.
From an investment perspective, and in contrast with some markets – the US dropping by as much as 40% before the bounce – bridge lending has delivered a steady return and has been a good place to be.
Specialist bridge financing fund Whitehall Capital Management Limited is set to deliver a pleasing return approaching 10% for the calendar year.
Looking to 2021
With the dark cloud that is COVID beginning to lift, Whitehall expects greater clarity and certainty come the end of Q1.
The first quarter will be challenging, but we will know where we stand with the Brexit process, and with vaccination programmes gathering speed, would expect life to be approaching near normal by the Summer and to be entering a period where lockdowns and severe restrictions are a thing of the past.
It will likely be a year of two halves.
Whitehall believes there is a 15-20% probability of the environment taking a turn for the worse, a 50-60% chance we see a return to near normal, with a 15-20% likelihood our best expectations are exceeded and that 2021 starts on a positive and remains on an increasingly upward trajectory.
There is a lot of cash on the side lines as we head towards the new year, and an abundance of interesting investment opportunities, but in spite of a positive market backdrop, Whitehall does expect to see an increase in bridge lending defaults as the impact of COVID plays through.
Residential and Commercial Markets
It appears the macro-economic environment will get worse before it gets better, and with the residential market close to an all-time high, Whitehall’s expectation is for prices to flat line.
The firm’s expectation is that GDP for 2020 will be down by as much as 10%, that unemployment will rise to 7% or 8%, and that banks will start to appoint debt collection agencies in a drive to clean up their property loan books.
That said, there remains strong demand for residential housing throughout the UK – and this should support prices in the medium to longer term.
The commercial market is however likely to experience a challenging year.
Office rents have fallen circa 20%, but this is not yet reflected in asking prices, and with the retail sector hit particularly hard, Whitehall’s expectation is for prices to fall.
The one bright spot, where Whitehall believes there is money to be made, is in data centres and distribution hubs, which seem set to enjoy continued good fortune as we emerge from the pandemic.
On a human level, Whitehall’s expectation is that we will be closer to where we are today than a new normal when the pandemic plays through.
Working from home has clearly impacted the office market, but says Whitehall Capital Founder and Managing Partner, Anthony Bodenstein:
“Businesses need to invest in people and those in the earlier stages of their careers need to be in the office environment if they are to develop as professionals.”
“10% of people were working from home pre-COVID and we would not expect that to represent more than 20% going forward.”
Top Tip for The Year Ahead
Reflecting on the areas of the market it believes will do well in the year ahead, Whitehall highlights the popularity of modular housing.
This is a complicated market to lend on because houses are built offsite and the lender does not control its security.
Nevertheless, Whitehall observes meaningful opportunities for a specialist bridge lender on the back of this growing trend and expects to be active in this space.