Downing LLP warns of continued property market correction in 2023

By Bridging Loan Directory 9th January 2023

Downing LLP is predicting a further property market correction in 2023, but it says this will not be a 2008-style scenario as both banks and non-bank lenders are in a far more robust situation this time around.

The London-based investment manager also urges property developers and lenders to adopt a long-term mindset as it points to history showing that those who continue to fund and build through a downturn typically emerge stronger, and in a position to take market share.

Downing LLP says the same is true for institutional investors – a long-term time horizon in residential development lending is vital in realising strong, risk-adjusted returns.

Parik Chandra, Partner and Head of Specialist Lending, Downing LLP said:

“Property lenders are far better capitalised and sources of funding in this market are less concentrated than previously.

There also remains a long-term supply/demand mismatch, which should support a softer landing in the event of a slowdown.

I believe a fall may, in hindsight, even be viewed as a healthy pullback, – particularly with the problems around affordability for younger people.

For property developers and investors, 2023 will be a challenge but also an opportunity.

Without doubt, well-capitalised quality developers are better equipped to ride out volatility and build their footprint.

Despite concerns about the economy and inflation, there is a huge need to increase the UK’s pool of residential property and the firm commitment from government to achieve this means developers remain optimistic about growing their businesses.

Ultimately, slowdowns are inevitable and part of the cyclical nature of the property market – that is why it is crucial to adopt a long-term mindset.”

Recent research with UK pension schemes commissioned by Downing LLP revealed the vast majority expect to increase their senior debt exposure to property development finance. Some 86% of pension funds said they expect to elevate allocations over the next three years.

The study also underlined just how rapid the adoption of the asset class has become among institutional investors.

Almost one in five (18%) pension funds surveyed expect defined benefit (DB) schemes to dramatically increase allocations to property development finance.

More generally, 84% of respondents believe the level of funding provided to UK residential property by DB schemes will increase over the next five years.

Despite concerns about the economy and inflation, in another studyfrom Downing LLP with residential property developers, more than three quarters (78%) expect their businesses to grow over the next three years.

Their optimism is fuelled by the need for a huge increase in the UK’s pool of residential property and the firm commitment from government to achieve this.

However, the study found 82% of developers surveyed are generally concerned about access to funding, as traditional banks step back due to concerns over a market slowdown and the looming recession.

This helps explain why 92% of developers expect the level of funding they source from specialist property finance companies to increase over the next three years.