The Business Killer: Are Extended Transaction Cycles Here to Stay?

Posted by Brickflow on 15th July 2024 -

Talking to industry colleagues, from lenders, brokers, agents & investors, everyone is asking the same question: Why are property transactions taking so long to complete?

And is this the new normal?

Property Transaction Timelines: From 85 Days to 159

Historically, non-residential property transactions take longer to complete than residential transactions, but from what we’re hearing anecdotally at Brickflow, it seems extended sales are a new reality across the board.

On the residential side of things, according to Rightmove’s May HPI, the average time between agreeing a sale and legal completion is 154 days.

This aligns with a report published earlier this year by Landmark (a data and information group specialising in UK land and property), citing that the average time from instruction to completion for property sales in 2023 was 159 days (England and Wales). In comparison to 2022, in which the post-covid buying frenzy continued through H1, it represents a 10% increase, and compared with the last ‘normal’ housing market in 2019, a 34% increase. Going further back to 2007, the average time from instruction to completion was just 85 days.

When it comes to securing a residential mortgage, the average time from instruction to mortgage offer received in 2007 was 38 days, whilst in 2023 it was 58 days – representing a 53% increase.

For residential property purchases, Landmark’s data shows a similar story – the average time from instruction to completion has risen from 75 days in 2007 to 123 days in 2023, an increase of 64%. Exacerbating an already prolonged period of stress for home movers, one in four (25%) homeowners buying in a chain report delays or cancellations on moving day.

Lower Transaction Volumes ≠ Lower Transaction Timescales

Typically, in a quieter period, transaction times for sales drop because everyone through the chain (borrower, lender, valuer / QS, lawyers, insurers, brokers) has more time and therefore should act quicker. Currently, transactions are lower, yet transaction timelines are higher.

In 2007, residential transaction volumes (England and Wales) were just under 1.43 million (gov.uk) and instruction to completion took 85 days on average. In 2023, there were only 903,620 transactions and completion took 159 days. For commercial property transactions, the sector saw its lowest total deal volume since 2013, yet still faces prolonged transaction times.

This puts pressure on estate agents, who are only paid on sale completion, as well as lenders and brokers, who are paid when the loan completes.

Even Fast Finance is Slow

Even bridging loans, once the bastion of speed, don’t seem to be immune.

According to data published by Bridging Trends, the average bridging loan completion time was 58 days in Q1 2024, unchanged since the previous quarter. That’s an 18-day increase since Q1 of 2019.

Demand for bridging finance has been significantly growing though, with the Association of Short Term Lenders (ASTL) showing loan books reached a new high of £7.6 bn in Q4 2023, which represents an increase of over 16% on the same period last year. Member loan books surpassed £7 bn for the three consecutive quarters in 2023, setting a new record.

Application volumes were also 25% higher at the end of 2023, compared to the previous year and completions increased by over 18%.  

Bridging Trends shows the primary uses in Q1 2024 were investment purchases and chain breaks. Regulated bridging loans increased their market share to 46.3% in 2023 from 44% in 2022, as buyers navigated increased rates or withdrawn mortgage products.

You can now secure regulated bridging loans on Brickflow. Search over 50 bridging lenders instantly, and receive a Decision in Principle within minutes.

Search Bridging Loans

Despite lower transaction volumes, we haven't seen the typical corresponding increase in transaction speed. On the flip side, the surge in demand for bridging finance hasn't led to any acceleration in transaction timelines either.
So Why Are Property Transactions Slowing Down?

Confidence Breeds Speed:

In a buoyant market where prices are rising, transaction volumes are higher and everyone is busier, so there is less second-guessing. That’s not to say that the professionals through the transaction chain are negligent in a busy market, it’s just that the consequences of getting it wrong are much smaller.

Here’s why – in today’s market, there is more chance of a loan going wrong. A slower sales market might mean a borrower can’t pay their debt back on time, or perhaps planning delays mean they have not been able to add the value needed during the loan term to facilitate an exit strategy.

If you’re the underwriter, valuer or lawyer on a loan that has gone wrong, your work will be analysed, and with less loans going through the books, problems are magnified. If you’ve missed something on a non-performing loan that would have stopped the lender lending, it could result in legal action with serious consequences for your career, or in fact your job.

With jobs and careers on the line, it makes sense that the professionals involved in the transaction process will exert more caution and take more time over their work.

However, the average valuation turnaround time in 2023 was 5.7 days, which is far lower than their peak in July 2022 (10+ days). So, is it really all down to the lender professionals, or are lenders themselves on a ‘go slow’?

Lender Redemptions:

Lenders focus on refinancing existing debts and extending redemptions

According to the latest Commercial Real Estate Lending report from Bayes Business School, lenders have been looking inward, seeking to refinance their existing loans. This accounted for 42% of total CRE lending in 2023.

The Bayes report finds that 60% of lenders have reported breaches and 61% have reported loan defaults in their books. There is a significant difference in loan book quality between lenders with smaller loan books (balance sheets under £1 billion) versus larger ones. The weighted average default rate of portfolios of larger lenders is 1.5% compared with smaller lenders of 7.5%. 

With tumbling deal volumes, and lenders prioritising problem loans over new loan originations, lending to UK commercial real estate dropped to £32 billion. The lowest figure recorded in a decade.

Balancing the loan books

Across the board, lenders are rewarded for running efficient loan books. In fact, the closer a lender gets to running out of money to lend, the more revenue they are earning (in interest charges and fees).

For lenders in the CRE space, the economics on shorter loans are more attractive. Assuming the same interest rates, a lender earns significantly more on 2x back to back 9-month loans with entry & exit fees, than they do on the same amount of money being deployed for 18 months, with only 1x entry & exit fee charged.

Let’s assume the following;

A mature bridging and development finance lender has a £ 600m funding line, typically aiming to deploy £ 50m per month, every month.

Consider that CRE lenders offer a phenomenal number of term sheets, which will be many multiples of the £ 50m they aim to complete (perhaps 10x or more).

Completing £ 50m per month is fine when you know that on average a similar amount of loans will be redeemed. However, now, due to a slower sales market, lenders have a redemption problem. Graph 1 shows how lenders balance their books in a normal market, vs their loan books in the current market (Graph 2).

Graph 1

Steady inflows and outflows in a normal market allow the lender to stay within their funding line parameters.

Graph 2

How quickly things can change when redemption's aren't as frequent as historical standards.

These are very difficult businesses for FD’s to manage. Slower completions, and only a small uplift in the uptake of issued term sheets, can see a lender quickly having liquidity issues.

However, the process of identifying and addressing problem loans is hopefully largely complete, with 2024 so far seeing a good recovery in liquidity. Whilst enforcement rates have increased, they remain very low overall, with lenders seemingly preferring extensions or restructuring over forcing sales in a weaker market.

Legal Fatigue:

Another hot topic is the increased bureaucracy and legal work required for specialist loans, often resulting in last minute requests from solicitors for more paperwork.

For example, Bridging finance is presumed to be a speedy solution, but when the underlying funds are coming from a mainstream bank, the underwriting standards & legal requirements are pretty much the same as if you were borrowing from that bank. Yes, the bridging lender will ultimately be quicker – they are streamlined for efficiency and have fewer layers of hierarchy - but they won’t be as quick as a lender using 100% private capital.

The proliferation of wholesale funding has brought more competitive funding rates to both the bridging and development finance sectors, undoubtedly allowing more of the UK’s property stock to be upgraded as well as promoting economic growth. However, there’s an undeniable fatigue amongst borrowers and brokers with the additional bureaucracy that has creeped into the sector.

Demand for private credit is on the up, but that brings its own risks for borrowers – less borrower protections and due process when a loan goes wrong, as one example.

We're also hearing anecdotes about the varying efficiency of solicitors, and the lack of solicitors specialising in CRE finance. Some of the delays are being attributed to remote working, where poor IT and more fluid working hours are said to be increasing response times. Ill-equipped solicitors can hold up both loan processing times at the beginning of a property development journey, as well as completing the sale of the end product, so using a specialist CRE lawyer is paramount.  

In Summary

So in essence we have very slow transaction cycles, caused by nervous professionals, in turn caused by nervous & perhaps illiquid lenders in the mid-market, who are under ever increasing pressure to protect the downside risk of their wholesale funding partners.

With just one lender, the effects are unnoticeable, but taken at scale across a whole industry, we get to the current stalemate.

Add into the mix, a broken planning system, volatile build costs, a lack of specialist CRE solicitors and the base rate increasing 14 consecutive times since December 2021, and you can see why the UK property market is in the current state it is, and why people are talking about a 'Liquidity Crunch'.

Solutions On The Horizon:

Upfront information: The principle of ‘buyer beware’ applies to property transactions in the UK, meaning sellers don't have to disclose issues relating to the property unless asked. Changes to material information requirements will ensure that all properties enter the market with questions comprehensively answered at the point of listing. So buyers know from the get-go if the property is suitable, reducing time wasting and costs incurred when discovering issues mid-way through the sales process.

Technology can help to rapidly obtain accurate data, securely.

Bringing the specialist lending market mainstream: High mortgage rates, product withdrawals, chain-break problems and slow transaction times has driven a surge in demand for regulated bridging loans. Residential brokers will need to familiarise themselves with the specialist lending market to meet the increasing number of ‘mainstream’ buyers turning to specialist finance.

Starting searches sooner: Property searches can take anywhere from 48 hours to 180 days depending on the Local Authority, how busy it is and the complexity of the property. To speed things up, sellers could order the search as soon as the property goes to market, but extra costs could be incurred, as currently local searches are only valid for 6 months.

More lender transparency: It’s difficult to predict where the market goes next, but lenders do need to rethink their models. More transparency on the true source of funds, and therefore the likely requirements and timescales to complete would be welcome. Borrowers will pay a premium for speed and ease of use, which avoids the stress of prolonged waiting times for transactions to complete.

Positive Momentum Continues in 2024:

All in all though, the property market has held up well against seemingly relentless economic or global issues, and H1 of this year has been a precursor to more positive movement ahead.

The national average number of days to secure a buyer dropped from 78 in January to 60 in May (Rightmove) and there are also more homes for sale than at any point in the last 8 years, as sellers return to market (Zoopla). The upcoming general election has had little effect on buyers or sellers’ plans, with sales agreed in the past 4 weeks (up to June) 6% higher than a year ago.

More choice is encouraging more buyers back to market - the FCA’s quarterly mortgage datashows that the value of new mortgage commitments increased by 30.8% from the previous quarter to £60.1 billion, and was 31.2% greater than a year earlier. This is despite the average 5-year fixed mortgage rate remaining stubbornly high at 5+%.

As we’ve mentioned in previous Industry Insights, if you’re bringing a property to market, pricing it right for today’s market it’s key to securing a buyer sooner.

If you’re a property developer or investor currently looking for opportunities in the market, the first place to start your due diligence is with your finance. With higher borrowing costs, and house prices only creeping, margins will be tighter - model your deal through Brickflow’s live development finance calculator to instantly see whether it stacks or not. In market’s like this, it’s common to overestimate profits, underestimate finance costs and ultimately overpay for a site, which can set your business plan back by years. A few seconds' search on Brickflow can prevent you making that mistake.