Mystic Martin's Predictions for 2022


After a rollercoaster 2021, which started with a national lockdown and then saw a boom in both construction and the demand for development finance, Britain’s real estate market shouldn’t expect a quiet 2022. Here Atelier’s Director of Origination Martin Gilsenan lays out his predictions for the New Year.

The only way is up (for interest rates): After several delays, the Bank of England finally pressed the button on an interest rate rise just before Christmas. While December’s change to the base rate was the first increase seen since 2018, it's certain to not be the last. With consumer inflation now predicted to hit 6% - three times higher than the Bank’s target - by early 2022, the ratesetters surely won’t stop there. City forecasters expect interest rates to rise by at least 1% over the coming year. For developers looking for certainty of cost, the case for borrowing at a fixed interest rate is now overwhelming. Those who choose a variable rate loan risk being hostages to fortune, as increasing borrowing costs eat into their bottom line even as they draw down funds.

Property price growth will soften: We saw extraordinary upward pressure on house prices in 2021, fuelled by ultra-low mortgage rates, the prolonged Stamp Duty holiday and buyers’ desire for greater space. With the Chancellor’s tax incentive now gone, the pandemic’s resurgence has led transaction levels to slow in recent weeks - though the chronic imbalance in supply and demand means average prices are still up by double digit percentages compared to this time last year. Yet the spectre of further lockdowns and the flood of new listings typically seen at the start of the New Year should cool the pace of price growth in coming months.

The development sector will continue to experience strong growth: Most developers have a healthy pipeline and sentiment is upbeat. Notwithstanding the challenges above, 2022 should see further strong growth, helped in part by the new Affordable Homes Programme and continuing investment in Build to Rent (BtR) schemes. Demand for bigger homes with more outdoor space remains robust, even though transaction levels have dipped following the end of the Stamp Duty holiday. Looking ahead, a successful roll-out of the Government’s booster jab programme will be crucial to underpin what has thus far been a broad-based economic recovery.

New capital will continue to flow into the market: Capital will continue to pour into the development finance sector, and this will keep loan pricing down as lenders with rigid funding lines compete for volumes. Many financial institutions became highly risk averse during the early stages of the pandemic, opting to build up large cash reserves instead. Their risk appetite has since roared back as the UK successfully rolled out its Covid-19 vaccination programme. Despite short-term concerns about the Omicron variant, many global financial institutions still have vast sums of capital to deploy and view the UK as an attractive place in which to do so.

Developers who go green will increasingly be rewarded with the best interest rates: Atelier’s Carbonlite Challenge might be a pilot programme, but it’s also a trailblazer that other lenders are sure to follow. Developed with support from the Royal Institute of British Architects (RIBA), Carbonlite throws down a gauntlet to developers – the more sustainable your project, the cheaper your finance. It uses the power of global capital to drive down the cost of building sustainably, rewarding green developers with rebates that bring the net annual cost of their borrowing down as low as 4.99%. Other lenders are scrambling to follow suit.

There will be fewer development sites available: The availability of land is likely to remain low in the markets where demand is highest. A toxic combination of landowners holding out for unrealistic values for development sites, and rising construction and finance costs in the face of slowing property price growth, will make some developments economically unviable. Planning permission remains problematic, and the Government’s recent U-turn on its efforts to streamline things hasn’t helped matters.

Residual values will come under pressure: Increased finance costs and spiralling construction costs will no longer be neutralised by relentlessly rising GDVs. Something must give, and it will likely be residual values. As profit margins are squeezed, cost assumptions and project fundamentals will be under the microscope like never before.

The music will stop on ‘pass the parcel’ bridging loans: Rising interest rates, spiralling construction costs and more lenders stretching to 85% LTV bridging loans will leave some borrowers unable to exit. Defaults, LPA and loss of C&I will follow.

Queens Park Rangers will win promotion back to the Premier League: QPR last won the Championship play-off final in 2014. The residential property market was booming back then as well, and with the current season off to a solid start, the omens for 2022 are good.