In 2021, many developers suffered from a lack of supplies and labour, a large rise in the cost of raw materials and delivery delays in their property development. While partly caused by Covid, a contributing factor was the extra burden of Brexit, preventing access to overseas labour and creating additional paperwork when importing construction materials and plant equipment.
For those in the building industry on fixed price contracts, this has caused a huge financial burden and for many, the additional costs have been the difference between profit and loss.
Construction insolvencies
It’s therefore no surprise to find the construction sector registered more insolvencies than any other UK sector and a number of these will be contractors who ceased trading as a result of not being able to complete the project within the contract sum.
Business intelligence firm, Credit Safe, says the construction sector is the most ‘significant contributor’ to insolvency numbers, representing 16% of all insolvencies in the year to date, Jan-Aug 2021.
Base Rate change
The historical low Base Rate of 0.1% which has been in place since March 2020 was finally increased by the Bank of England to 0.25% in December, and although still insignificant, signalled the end of low rates. It’s clearly not going to be the last with many suggesting the rate could increase by up to 1% this year.
Any change will not affect those on fixed-rate loans and mortgages for a while, but for those on variable interest rates, the increased cost of borrowing will reduce profit margins immediately. In order to cap what could be an increased finance cost, it’s important to source lenders willing to offer fixed-rate property development finance.
Property boom
Covid-19 and the ‘work from home’ trend brought about a change in consumer demand for more out-of-town, rural locations with additional space and a ‘safer’ family environment. This, coupled with low interest rates and the stamp duty holiday, created a boom in demand and a spike in property prices outside main city locations.
By July 21, the Office for National Statistics reported the average UK house price was £256,000, an increase of 8.0% when compared with the previous year. And in some rural and coastal areas, house price growth was three times the national rate; namely Conwy in north Wales (25.0%), north Devon (22.5%) and Richmondshire in the Yorkshire Dales (21.4%).
There was however, still demand for properties in central locations. The end of the stamp duty holiday and a phased exit out of lockdown brought back an appetite for city-living, which in turn increased prices, while flattening rural values.
As early as May 21 Rightmove reported city centres were witnessing an increase in buyer demand with flats the top priority. In York, demand was up 76%, in Norwich 62% and Sheffield 57%. Even London reported hikes of 30% (inner) and 34% (outer).
But with interest rates rising again, and a fresh wave of Covid infections, demand may cool, even though January is traditionally the time for new property listings.
Rental rebound
Rental properties are also on the rebound, offering impressive yields for developers. In November, the Buy Association identified London, Birmingham, Edinburgh, Manchester and Leeds as key UK cities where rental growth has reached impressive levels and in its UK Rental Market Report, Zoopla said at the end of September, rental costs rose by an average of 4.6%. When excluding London, it was a 14-year high at 6%.
Market factors
Now more than ever, it’s important developers take into account the market factors when bidding for properties, including; the rising cost of materials, a shortage of skilled labour and the impact on wages, and uncertainty over market values of completed properties. Lenders will want to see a contingency built into construction costs and while 5% was often accepted in the good times, some are now looking for 10% and more as a contingency.
The old adage ‘the profit on a site is made on the purchase and not the sale’ has never been truer. Developers must consider their residual calculations when bidding on sites, and ensure they’re viable on today’s values. Do not be reliant on a rising property market to make the profit .
In the short term, vendors may still be holding out for unrealistic asking prices for their sites, and a shortage of available sites is not a reason to buy one that may not be financially viable.
New home shortage but funds available
A shortage of new homes coming to the market meant the Government failed in its election pledge to build 300,000 new homes per year. This target hopefully will be boosted by the Prime Minister’s pledge to invest £640bn in the UK’s civil infrastructure over the next five years.
Consequently, I believe there will continue to be strong demand from developers, particularly as there appears to be no shortage of funds available for them and pricing remains low (as lenders compete for new business to meet their lending targets).
Planning
Meeting Government targets is not made any easier by the Local Authority planning process and with many council planners working from home during the pandemic , the already cumbersome decision-making structure has slowed further as council meetings are cancelled or deferred and very few have delegated authority to make a decision.
Changes to the Local Authority planning system are afoot however, and the Government’s planning reforms are due to go before Parliament in the spring. Recommendations include; introduction of a digital planning system, an infrastructure levy, street referendums on a property development and Brownfield Site investment.
In addition, the recently-published Building Safety Bill will certainly make homes safer, and in doing so, improve the reputation of the construction sector.
Go green
Finally, in a move to provide cheaper finance for housing projects which meet green credentials and are sustainable, a number of lenders have started to offer pricing incentives, such as cheaper interest rates and a reduction in fees, for developers who meet energy performance targets and deliver an ‘A’ EPC rating.
Mortgage lenders are also offering ‘green mortgages’ to new homes that meet their energy efficiency criteria, and older renovated properties may also qualify. These initiatives are designed to support the Government’s COP 26 goals and its target of net zero emissions by 2050.
The pandemic has changed the way we work and in the property development and construction sectors this means less onsite personnel and more agile working practices, similar to other industries.
Cost-efficient projects
The ongoing skills shortage, coupled with a greater focus on sustainability and innovation, means all stakeholders will have to consider more cost efficient ways to deliver projects. At Brickflow I believe we’re already helping developers on their cost-efficient journeys.
By harnessing property development finance technology and innovation, we’re connecting borrowers to highly-competitive lenders, all keen to offer the best finance deal, and in doing so, saving developers hundreds of thousands of pounds in deposit fees and interest rates.
By Tim Noble, lending director, Brickflow.
