After a volatile period, 2023 brings the prospect of greater stability – and with it a development finance market that can act with increasing confidence.
Matthew Yassin
Director of specialist debt advisory
Predictions are always something of a hostage to fortune, especially in a sector as exposed to shifting realities as development finance. But as we look ahead to what 2023 has in store, there are reasons to be optimistic that a period of greater stability will give the market stronger foundations to work from.
The volatility of recent years has hit the development sector in three major ways. Firstly, the pandemic, and to a lesser extent Brexit, caused manifold supply chain issues, creating material shortages and increasing lead times. This then provoked huge rises in the prices of both material and labour, something that was stoked by the energy crisis. Finally, belated efforts to crush inflation have seen interest rates rise sharply, with further increases anticipated.
However, absent any new ‘black swan’ events, the pressures in these areas are starting to subside. A combination of receding energy prices and base effects should see inflation return to a far more manageable level as the year goes on. This is turn will impact on the trajectory of interest rates, which are now anticipated to peak at a lower level than previously feared. In parallel, supply chains are recovering from recent shocks, reducing lead times, increasing availability and having a further deflationary effect.
While the cost of money, materials and labour will settle above pre-pandemic levels, the equilibrium they will reach offers an opportunity for green shoots after a period of significant volatility. A more stable environment will encourage development and allow lenders to act with increasing confidence.
This new equilibrium will of course have some victims. Higher costs will put downward pressure on land prices, with landowners facing a period of realisation about new market values. Similarly, development viability will be hit and schemes at the margins will find it difficult to progress; many projects will face compressed GDV and equity injections if they are to continue. But the payoff will be a more realistic, streamlined market with the solid foundations to encourage transactions. As ever, it is the best assets that will most easily navigate the new normal.
In this environment, good finance and debt advisory will be key. Lenders should be applauded for the support they have given the market during recent uncertainty, but they can only do so much. As things settle, there will be greater clarity around what products are in the market, and accessing the right financing mix – be it equity, senior debt, development funding or bridging loans – will be key to success of any project.
Wishing you all a happy, prosperous – and stable – 2023.
This article first appeared in the February 2023 edition of Business Moneyfacts - you download the full magazine here.