Why restructuring and financing opportunities will be essential in 2023: Q&A with Justin Trowse

The Structured Property Finance team works on bespoke deals with brokers and borrowers to ensure the right funding is delivered for complex projects, here, Justin Trowse, reviews his time in the market and what we can look out for in the coming months. You can contact the Structured Property Finance team here.

How long have you worked in property and finance markets?

I’ve worked in the property and finance markets for the past twelve years.

How long have you been at LendInvest?

Coming up to seven years.

During this time, what are some of the trends you’ve noticed developing in the specialist lending market? 

Joining LendInvest, it was still in a start-up phase and there weren’t many market participants. Today, there are over two hundred short-term specialist lenders, targeting different segments of the market, creating healthy competition, product innovation, and most importantly, market liquidity.

Historically, structured property finance and development finance has been reserved for bank lenders or alternative funds, typically on a larger ticket basis (say £50m+). 

However, we are seeing increasing demand for liquidity in the smaller ticket segments sub £20m, seeking fast and practical solutions to real estate financing.

We are also currently seeing an increase in lenders that are multi-faceted, and that are incorporating technology into their product suits. LendInvest has always embraced this, with the thought train that you can acquire a property, refurbish/build/restructure, and then transition to a longer-term hold, with technology and flexible capital aiding throughout the process.

What was 2022 like for you and your clients? 

Periods of market turbulence are often not far around the corner. In 2022 we saw the Ukraine war and inflation, but the important thing during every event is how all sides of the industry react to them, particularly those with clout. 

The mainstream media is doing a good job to stir emotion and create reaction, but it’s important to form and retain a rational and objective approach to the situation that arises. A harmonic relationship between lender, broker, and borrower, enabled by technology, stable capital, and people with proven ability and experience have been vital this year.

We saw increased requirements in restructuring, development exits and pre-construction facilities, mainly as borrowers have had to face a variety of different headwinds due to external factors out of their control. 

Recognising and understanding these situations and requirements has been key to delivering the business the Structured Property Finance team funded in 2022.

What do you expect the landscape to be for 2023? 

For residential, I think we will see a continuation of house price reduction, back to pre-pandemic levels, thus having a meaningful reduction in residual land values, which in turn will put pressure on the viability of existing and new schemes. 

It will provide bargaining power in some instances, but the most important thing to remember is what that looks like in a short time period versus a mid-to-longer term view, as we’ve had a lot of volatility in such a short space of time.

We all know about the base rate and cost of borrowing increases, so I also expect an adaptation in strategy for newer investors and developers in order to weather the short-term environment. 

The fundamentals are that demand still outweighs supply quite by a substantial amount, but for those who require debt to acquire/hold property, affordability for the end user will play a key part, especially for the mid-market. 

With that in mind, we could see more SME developers shifting strategy to sell upon planning gain, rather than taking on construction and sales risk, or refinancing once they hit practical completion.

In commercial property, we see yield widening which will create downward pressure on values for 2023. With inflation we also are seeing and expect rental growth, which can be a positive from a debt service cover perspective. 

Now, with the targeted base rate hikes of between 400 and 450 bps, for investors, the opportunity cost of government debt and other less labour intensive investment will be a serious consideration.

The planning system is still broken, so developers and investors will be at the mercy of local authorities to execute their business plans. I don’t expect this to change in 2023, but this will provide potential essential restructuring and financing opportunities to bide essential time and liquidity during the interim.

Overall, I do expect the market shifts of 2023 to have opportunity, and I think a glass half full approach is justified. Typically, on the Structured Property Finance team, we typically deal with sophisticated borrowers, and those borrowers are one’s that are more likely to navigate and create opportunity, than those without prior market experience.

What are the opportunities for investors and developers, and how can lenders support them? 

With the changing market environment, there will be a number of lenders looking to over-protect their downside risk positions for the sake of capital preservation, which will include a less bullish stance on new originations and a more aggressive stance on redemptions, which in turn will create many opportunities for other lenders with flexible capital and experienced talent.

With that in mind, we have recently launched a new debt fund and are also armed with additional support from our institutional investors, giving LendInvest one of the broadest capital bases in the industry. 

That, coupled with an experienced and reliable Structured Property Finance team, no matter the requirement, we have a workable solution.