A new prime minister is in place and the feeling is that now we are almost in a position where we can start to address the monumental task in front of us. The FTSE 100 is now around 5.5% higher than its pre-Brexit peak, credit markets are functioning well (in fact, UK government bonds have never been more in demand) – there is almost a positive vibe in the air.  

The problem with a positive sentiment is that it can get crushed with one piece of bad news – people tend to panic as a crowd (but only gain confidence one person at a time). Do I think that there is likely to be a significant property market correction? In short, yes, particularly in London.

Whether there is a property crash (and if so, its severity) or not will depend on two competing factors. First, the negative response of investors to the years of uncertainty that lie ahead for the UK and its economy. This is especially true for foreign investors who have seen their UK investments collapse in value in US dollar terms. Do they now cut and run (ie sell their UK property holdings for fear of further price deterioration)? Second, there is the positive impact of new foreign investors entering the UK given the fact that in terms of their local currency property prices have fallen by around 20% since Brexit. On balance, I think that the negative factors will outweigh the positives. I believe that serious international investors would have already fulfilled their UK property portfolio allocation over the last six years and are unlikely to have a huge amount of remaining pent-up demand.   

This brings us on to the question of how severe any correction could be. It is a simple fact that property prices do not materially adjust downwards unless you have forced sellers. For the last 10 years we have seen residential property owners just decide to stay in their properties rather than accept a knocked-down sale price (after all, mortgages remain ridiculously affordable). However, the last few weeks have seen the introduction to the market of the forced seller in the form of UK commercial property funds. Approximately £20bn of commercial property funds have now suspended their investors’ ability to withdraw funds – and the funds now have to liquidate their portfolios.  

This is the sort of news that really concerns property investors and will force them on to the sidelines. With tens of thousands of high-value residential property being constructed in London (especially around Battersea), the high level of supply combined with a potential dearth of investor demand could result in a huge property overhang. Clearly the banks that have funded these developments need to be repaid and will, ultimately, force the developers to sell these units for whatever price they can get.

The impact of a house-price decline and, importantly, the withdrawal of credit lines are hugely significant for those bridging lenders who have operated in the higher LTV space historically. It is possible that without the ability to re-bridge their defaulting bridging loans, the loan books of these lenders will sour quickly. Negative book performance combined with crumbling investor confidence would spell the end for many of the lenders in our sector – large and small. For the avoidance of doubt, Funding 365 was established with a downturn in mind, so we remain fully open for business and remain eager to write new loans.

Attributed to Mike Strange, Managing Director of Funding 365