Outlook for development finance takes a hit as industry says staying in EU best for London development activity

The Autumn edition of the London Development Barometer (LDB) survey has found that 59 per cent of respondents believe that staying in the EU would be the most advantageous outcome for London development activity.

The survey was administered in October 2019, at a time when the UK government was attempting to negotiate a revised Brexit deal before the 31 October deadline. In this context, 23 per cent of the respondents indicated no preference to staying in the EU, leave with a deal or leave without a deal, as long as some clarity is achieved. Just 5 per cent believed London’s development activity is best served by a no deal Brexit. 
 
The LDB was launched in Autumn 2017 to gauge industry sentiment across a number of factors affecting London development activity. Although fears around Brexit have allayed since then, Brexit has consistently been cited as the one of the industry’s top two concerns. Some 76 per cent of the respondents still believe that the former will have a negative impact on London development activity, compared to 80 per cent two years ago.
 
This reflects the industry’s glum outlook on the benefit of the Article 50 extension six months ago. At that time, 48 per cent of the respondents did not believe the extension would lead to a better deal, while 36 per cent did. Almost 60 per cent agreed the ongoing uncertainty would have a negative impact on development activity, while 13 per cent foresaw a positive impact.
 
Nonetheless, the industry’s overall cautiousness surrounding London development activity has levelled with 43 per cent believing there will be less development activity in the next five years, compared to 46 per cent a year ago and 57 per cent two years ago. That is despite bolstered industry concern with a number of factors relating to the development finance landscape in the last six months.
 
The ongoing parliamentary impasse has caused both the Bank of England and British government to downgrade its economic forecasts, while geopolitical conditions have contributed to an increasingly unsettled global marketplace, reflected in a downward adjustment in global growth forecast by the International Monetary Fund.
 
Fears around the global economy and global politics have heightened as a result. 63 per cent believe the global economy will have a negative impact on development activity, increasing from 52 per cent six months ago and 42 per cent one year ago. Meanwhile, 57 per cent believe global politics will have a negative impact, compared to 48 per cent six months ago and 50 per cent a year ago.
 
In this context, the industry has become more concerned with the development finance climate and foreign investment. Just 42 per cent believe inward investment levels will either increase or stay the same, compared to 64 per cent six months ago and 51 per cent one year ago.
 
71 per cent believe finance will become more expensive, compared to 65 per cent months ago. Only 27 per cent believe there will be an increase in the availability of finance, compared to 37 per cent six months ago, and 42 per cent of respondents believe the changes to the availability of finance will have a negative impact on development activity. 54 per cent believe the same of the changes to the cost of finance.
 
Despite this, the industry is no more concerned about the impact of cost and availability of finance than before. Some 63 per cent predict construction costs will have a negative or significantly negative impact, compared to 68 per cent six months ago.

The industry believes that government investment would help development activity with 65 per cent predicting a positive or significantly positive impact. 68 per cent believe the same of Crossrail, although that is down by 10 per cent in the year. 
 
Confidence in market demand also remains positive. 89 per cent and 85 per cent predict an increase in demand for senior living and affordable/council housing, increasing by 5 per cent and 11 per cent in the last six months, respectively. 78 per cent continue to predict an increase for Build to Rent, while confidence in all other sectors were positive on balance.
 
Retail remains the exception, with an overwhelming 86 per cent predicting a decrease in market demand, and just 3 per cent predicting an increase. Several respondents have noted that repurposing vacant retail units are as a result on the rise.
 
The industry’s view of government remains overwhelmingly dim, with 80 per cent believing they are not doing enough to enable development in the capital Improving the town planning processes continues to be the industry’s top priority for government, with calls to mitigate the Brexit transition period in second place and funding for local authorities, infrastructure and housing delivery in third. 
 
Richard Hollingworth, director, M3 Consulting, says: “Investment in London real estate driven by global capital flows and supported by ongoing currency plays remains strong. However, the results of our latest survey indicate that the industry is braced for a more challenging environment for development finance and costs, as it calls for the government to focus on improving town planning processes, sort out Brexit and invest in infrastructure.“