What will 2022 hold for the property industry?

2022 looks to be a challenging year for the real estate industry with plenty of changes on the horizon. Here, we take a look at what developers, landlords and investors might face.

Shortages of materials and people

Shortages of key construction materials and in talented labour are expected to continue throughout 2022. Developers, contractors and their clients must prepare.

Developers and their contractors face challenges in pricing work as material costs continue to fluctuate and increase. Shortages of materials can also lead to project delays. Who carries the cost of those increases and responsibility for delays will be critical.

Standard form contracts tend to pass that responsibility onto contractors and if they are not careful they may find themselves in a position where they cannot claim for increased costs and face penalties for delays.

Contractors when pricing work should look to include fluctuation clauses to better shield themselves from cost increases that are entirely outside of their control.

The rise of turnover rents

Retailers and their landlords will accelerate the adoption of turnover rents, but significant challenges remain.

Turnover rents, as the name suggests, is a lease agreement between a retailer and their landlord with the rent payable directly linked to the turnover of that store. A lower base rent is typically agreed, with the landlord sharing in the success of its tenant.

They are becoming more mainstream – the fashion retailer AllSaints agreed turnover rents on all of its stories in 2020/21 – but negotiations are often fraught.

The sticking point is usually over what constitutes ‘turnover’? Retailers will argue that only sales in-store should be directly linked to rents. Landlords, arguing that stores now act like mini distribution hubs, what to see ‘click and collect’ and ‘returns’ recognised.

We are likely to see greater pressure on retailers and landlords to agree a standard form approach to provide much needed clarity.

ESG agenda will shape funding

The government in late 2021 published its Greening Finance: a Roadmap to Sustainable Investing, which sets out its roadmap to a more sustainable economy. It is a recognition that the finance community has a clear role in delivering the government’s ESG (environmental, social and governance) agenda, and the real estate community is firmly in the spotlight.

Real estate businesses will need to provide investors with ‘decision useful’ information about sustainability. These disclosures will sit within a Sustainability Disclosure Requirement framework that intends to bring existing sustainability information into one new regulatory framework.

The aim of the new regulations is to ensure that investment is aligned to sustainability goals.

Real estate businesses will need to ensure they have the governance and reporting structures in place to meet the requirements of investors and funders.

Interest rates

The Government’s Monetary Policy Committee (MPC) chose to raise base rate by 0.15% on 16^th Dec 21 bringing base rate to 0.25%. One of the main reasons for increasing the rate was to calm rising inflation rates which are currently 5.1% against the backdrop of the Government target of 2%.

Rising interest rates adversely affects business and individuals who borrow money. The recent increase adds a relatively modest £1,500 of interest cost per annum to a real estate developer or investor who has £1m borrowed but added to the other additional costs and challenges outlined in this article it places further unwelcome pressure. Continued increasing borrowing costs are on the horizon with UK financial markets pricing in further uplifts in base rate during 2022 and beyond peaking at around 1.3% in 2027.

Businesses and individuals may wish to consider fixing their borrowing costs now, just as they may do with their personal mortgage to help protect them from a rising borrowing rate environment over the next five years.

Restrictions on commercial landlords to be lifted

Restrictions on commercial landlords will lift on 25 March, although restrictions on statutory demands and winding up orders will remain in place until September 2022.

Landlords facing unpaid rents will undoubtedly look to recoup lost income as soon as they are able and are encouraged to try and reach an agreement before enforcement action is taken. If an agreement cannot be reached, they will need to follow a formal arbitration process with its decision binding on both parties.

It is safe to assume that we will see an increase in statutory demands as the year progresses with landlords and tenants advised to take advice before taking action.

Ground rent restrictions

The government in 2021 announced that residential developers will no longer be able to charge ground rents on leasehold properties – a decision that was welcomed by homeowners across the UK. However, the legislation does not affect those properties already subject to ground rents.

Countryside Properties, a large residential developer, has already said that it will scrap all of its ground rents, a move widely applauded.  But there are potentially significant financial consequences for developers with a ground rent portfolio, so others may not follow in these footsteps.

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