Q1: A good starting point is to examine how the property market responded to the pandemic. At the beginning of 2021, Swoop was predicting an increase in commercial property activity. Ian - is your prediction coming true? And what would you say are the main drivers of demand?
Ian Boden (Swoop Finance): From the number of inquiries that we’re getting for property finance, it’s really starting to take off.
Understandably most of the activity in the finance market last year was around CBILS. We saw a real run of applications ahead of the deadline at the end of March 2021. Now we’ve started to see an uptick in more traditional funding requests, particularly relating to property - but they’re still being affected by Covid.
Every business has been impacted by Covid during the past 12 months - some positively and sadly some negatively. Businesses’ five-year financial plans all went out the window last year. So now they’re all reassessing their forecasts and growth plans for the next five years - and off the back of that, reviewing their borrowing requirements
A lot of businesses took out CBILS to see them through lean times, but for accountants like you, Owen, the question is whether they need to maintain that lifeline or think more about growth.
Pandemic impacts across the sector
For property, the impacts varied across different sectors. Face to face retailers on the high street have got a lot of problems, so lenders are less willing to lend. The switch to digital was already happening, but Covid accelerated that.
While retail has been struggling to find finance, the distribution market is really growing and looking for financing. Anyone involved in digital fulfilment and supply chains is looking for more space - we just placed a deal for a distribution center that was looking for new warehouse premises to support its growth.
Leisure and tourism have gone through a dip and are now coming out the other end of the curve. While pubs, bars and restaurants still face a few more challenges, holiday accommodation and places like that are coming back and beginning to reassess their growth plans and need for finance. We’ll tackle their situation in our next Q&A chat.
The situation for businesses with offices is really interesting and is in the news all the time. The big banks have driven this, with HSBC and Lloyds planning big drops in their office space requirements. But any business with office space will be going through the same thought process.
When they go back to the office, people will now work there one or two days a week. Or companies will have two different teams in on different days, so they won’t need the same degree of office space and will take the cost savings on that.
So we’re businesses considering the move to smaller premises in new ways. If they’ve got two offices, do they refinance one and release the other? And then what do we do with the office space that nobody now wants?
We’re already seeing some offices being bought by developers planning to convert them to residential. There’s a lot of activity in those sectors and marketplaces.
How the office market is changing
Owen Kyffin, Whitley Stimpson: I think you’re absolutely right. There will be a permanent shift in how people work. We’ve already implemented changes with our own staff to introduce flexible working - very few of them want to be permanently back in the office all of the time.
We’re starting to discuss with them when and where they’re going to work - some of the time here and some of the time from home. In terms of productivity, quite a lot of them have been more productive working from home.
As you say, it just doesn’t feel like there’s going to be the need for the same quantity of office space in the future. Around here, our local council had acquired a couple of large office buildings that had been standing empty for donkey’s years and developed them into social housing.
And I’ve actually seen some clients interested in positively investing in office space, where it’s flexible, like the Regis model, which allows you to buy in and buy out as you need space in that area.
IB: We dealt with a similar scheme recently in Manchester for serviced offices that do pay-by-the hour rentals. They’re moving into a new building to expand the space they’ve got available. I think you’re right we’ll see growth in that serviced office accommodation type.
VAT complications
Q: What are the biggest issues facing owners and developers?
OK: In terms of cash flow and financing property conversions or changes of use, either from retail or offices into residential, can be very tricky from a VAT perspective.
You might be being charged three different rates - some standard rated stuff, some reduced rate stuff from your builders and some stuff which is zero rated. Some of that may not be recoverable. We’ve had developer clients with cashflow challenges where we’ve worked hard to minimise the amount of VAT they have to pay and maximise the amount they can get back. It’s always worth taking timely advice on that.
IB: In terms of development finance, we’re seeing more activity in residential than commercial. You’ll notice the housing shortage is still there. The residential property market is running hot, so there’s more lender appetite in residential development, because that’s where most of the market activity is.
If you look at the office to residential conversion we’ve talked about, it’s probably trickier to place from a loan perspective, depending on what kind of office it is. If it’s a nice office that’s going to turn into a residential development of nice-looking flats, there will be far better lender appetite.
And then there’s bridging finance to develop and then rent out conversions to fund more ground-up development. If you look around any local area, the number of new building schemes coming out of the ground has grown massively in the last 12-18 months.
OK: Absolutely. We’ve got many clients in the agricultural sector who we’ve helped with land deals. Prices for this type of land are really buoyant at the moment.
IB: I agree. Residential development is a really strong sector. Those businesses aren’t seeking finance to bail them out. I think it’s more about growing or getting back to the steady state of their refreshed five-year plan.
If you’re an accountant looking to advise clients on their funding options, visit the Swoop Finance marketplace or get in touch with Swoop’s team of specialist advisors.
