Posted: 24 Jun, 2020
Part 2 of our webinar series with Colliers International took place on 17th June and we heard from six expert panellists on how real estate construction has been affected by Covid-19 and how development risk can be managed going forward.
We thank Nick Hammond from Colliers for moderating this webinar which was attended by over 220 people and can be accessed in full here.
Nick Hammond – Head of Advisory & Restructuring, Colliers International
Colin Wood – Director, Project & Building Consultancy, Colliers International
Paul Harper – Director, Project & Building Consultancy, Colliers International
Ollie Shipman – Director, Valuation & Advisory Services, Colliers International
James Burke – Associate Director, Residential Development, Colliers International
Guest speaker - Ellis Sher – Co-Founder & CEO, Maslow Capital LLP
Opening the discussion, Nick Hammond: Head of Advisory & Restructuring at Colliers, spoke about the intense strain that the construction industry has been put under over the last three months. This follows a period of sustained stress which the industry has already been experiencing, caused by a combination of factors including skills shortages, increasing materials costs and over-competitive tendering.
Indeed, the construction industry has for some time maintained the highest number of insolvencies of any sector, including the headline-grabbing events which have been taking place in the consumer facing sectors. The abrupt dislocation to demand and supply caused by COVID-19 and the longer-term effects of social distancing, which are not yet fully quantified or understood, surely means that this trend is likely to continue.
Nick outlined how construction is an integral yet complicated part of the real estate industry, with lots of variables which are constantly changing. Distress was already high in the sector and COVID-19 has effectively put it in a pressure cooker, so managing development risk will be critical for all stakeholders over the months ahead. Unfortunately, there will be some situations where an insolvency cannot be avoided or recapitalisation is not possible, so the important thing here will be swift and decisive action to identify other options, assess viability and implement a strategy to protect as much value as possible for stakeholders in an equitable way.
Colin began by saying that pre-lockdown, the industry had been performing well, buoyed by the so-called ‘Boris bounce’ following the election with output up by 1.4%. However, by the end of March, construction activity saw its sharpest decline in 11 years with the lockdown presenting an unprecedented challenge for the industry.
Most construction sites shut down for over a month and when many reopened, they were then faced with the challenge of getting materials and how to operate safely within Government guidelines.
So, without any productivity for almost two months and reduced productivity now, Colin said there has of course been an impact on pricing which has been very volatile with both deflationary and inflationary pressures. This has put even more pressure on an industry that was struggling before the lockdown, with construction seeing the most insolvencies of any sector in 2019, a trend that’s expected to continue and even accelerate.
To manage risk going forward, Colin said that clients and consultants need to put much more emphasis on planning, information gathering and increasing their due diligence, not just of the main contractors but of everyone in the supply chain. He also warned that bidding is likely to become very competitive with some contractors likely to bid at below cost and while these bids may seem attractive, clients need to be careful to interrogate both the prices and the financial stability of the contractors.
Ollie Shipman, Colliers’ Director of Valuation & Advisory Services, then continued with an overview of how valuations have been affected considering that when the lockdown was announced, new deals stopped overnight.
Ollie said he and his team were under pressure to assess how values had changed but with no new deals to provide any evidence, they didn’t move on their Gross Development Values (GDVs). As an industry, Ollie said there was a conscious decision not to arbitrarily reduce values and with no new deals truly able to meet the RICS definition of market value, and therefore be used as evidence, Ollie said this still hasn’t changed and their valuation approach is entirely on a case by case basis and is evolving daily.
In terms of managing development risk, Ollie has seen most lenders become more selective about who they are lending to and developers are being more cautious about their costs. To stay competitive as costs have gone up, many developers are squeezing their own profit margins.
James Burke, Colliers’ Associate Director of Residential Development, then provided a short summary of the residential development transaction market in London and the South East. At the beginning of the lockdown, James said the majority of house builders put an immediate pause on land buying but that most are now back to buying again.
James said that now, the primary focus for most developers has been unconsented development sites that can be acquired either unconditionally or subject to planning, allowing the purchaser time to obtain suitable planning permission and for suitable time to have past to provide more clarity on both the construction and sales markets.
Looking forward, James expects to see plenty of development sites, particularly those with planning permission, to come to market towards the end of the summer. And given the inertia over the last few months, it’s expected that we won’t see the usual summer lull in July-August as developers look to make up for lost time.
Touching on the new homes sales market, James said that pricing has remained resilient with pent-up demand translating into high interest, offers and newly agreed sales across the board. Whether the levels of interest remain high after these first few weeks is uncertain.
Our guest speaker, Ellis Sher of Maslow Capital, then gave us his perspective as a lender saying that Covid-19 ‘hit us with a thump’. Maslow Capital had to adapt its working practices to ensure that it could continue financing supply chain payments without being able to visit the sites.
Considering the impact on lending, Ellis said the biggest change he had witnessed was in the reduction in leverage where pre-lockdown levels of 65% were now at 55% - 60%.
Ellis also spoke about the likelihood of increasing strain on funding models in the coming months, leading Maslow to launch its Loan Book Liquidity Fund. The Fund is aimed at providing other lenders and borrowers with cost to complete facilities as well as refinancing existing loan books, allowing a return of liquidity to investors ahead of underlying loan redemptions. Ellis also saw opportunities to make funds available to LPA Receivers and Administrators who have responsibilities for the delivery of incomplete developments where Maslow would provide cost to complete facilities to ensure the developments reached practical completion, thereby maximising returns to creditors. Whilst there are signs of distress in the market it mainly relates to pre-COVID transactions that were already weak. Ellis expects this to gather momentum in Q3/Q4.
Maslow Capital are also very aware that all of their completions in recent weeks have been due to pre-Covid activity and so Ellis thinks that the next three months will be an important test period to see what genuine transactions are happening and what prices levels are in the new world.
Thank you to all the speakers for their time and to everyone who joined the webinar. The next TMA event will be a webinar in partnership with Duff & Phelps to take place on 8th July with details of how to join released soon.
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