The Real Risk of Funding Projects in the Current Climate

by | Mar 31, 2020

As we enter unprecedented times across the globe due to the Covid-19 outbreak, we hear unsurprisingly that many lenders have pulled back for the foreseeable future.

‘Heard on the Street’ is that given legacy issues with managing existing portfolios, many have stopped taking new applications or even halted completion processing mid-stream. Of course managing the existing portfolio risk is one thing, predicting the future is quite another just now. 

Despite the pullback, sponsors will be pleased to hear that there is still plenty of dry power on the sidelines for funding from institutional capital. And as retail investor sentiment shifts away from high volatility liquid markets to more stable hard assets like bricks and mortar, there will be even more capital starting to flow. Few people are smart enough to call market tops and bottoms, and the recent liquid market volatility will draw people to investments that offer decent, stable returns in the medium term. Unless there is a radical shift in our economic social and political system, then that demand for housing will remain the clear choice for many.

In the meantime as we follow the day-by-day changes taking place as a result of the pandemic, Hilltop are keeping a close eye on several project-related benchmarks: cost fluctuations over the next 6-24 months; GDV volatility; affordability; sales periods.

Project timelines have been the top topic for many developers with whom we’ve held talks over the past three weeks. Covid-caused supply chain disruption globally could affect the speed at which materials arrive on-site, making material possession and sourcing a key factor to consider in our underwriting. We anticipate construction periods that were expected to take 12 months are now more likely to take no less than 16 months.

Of course, this pandemic will not last forever – it seems that our government’s preventative actions are starting to flatten out the curve. And while some of the lenders have pulled back for the time being, they will return to the market in due course. That said, it’s likely their pricing will be risk-adjusted against these shifting goalposts and most will require higher guarantees and contingencies from sponsors.

The reality is that we will find ourselves in a new norm. Add to that Brexit pending in December 2020 and suddenly this isn’t real estate 2012 anymore. Greater caution with better selection of both projects and sponsors will lead the way for the foreseeable future.


Sincerely,

Paul Oberschneider
Founder & CEO

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