Working through current economic issues to help developers

In our latest blog, Development Monitoring Director Jonathan Witter takes a close look at current construction costs, the residential market, and our stance on helping developers now and in the future.

Construction costs

Following the continued economic uncertainty, we have seen development costs moving towards a stabilization for many materials. Nevertheless, those materials requiring high energy input have particularly suffered from price inflation. 

Recent political and market uncertainty has raised the prospect of a second wave of inflation due to a softening of the pound against the euro and dollar. Due to the high proportion of imported construction materials into the UK, this leaves materials exposed to cost inflation from a weakened exchange rate. However, more recently fears of a second wave of construction cost inflation have receded somewhat due to recent market stability, although the effect of the fragile energy market remains a concern.  

On the ground, developers are reporting fewer problems with supply chain overall and for some materials such as fit out goods (e.g., kitchens, bathrooms etc.), overstock among some suppliers means some welcome cost savings are possible going forward.

Residential property market

Nationally, house prices are showing signs of softening, but annualized growth is still at 8.2% p.a.  (Zoopla) by the end of October 2022. Most brokers and agents are expecting negative growth in 2023 but opinion is still divided on the extent of any decline. The successive increases in the Bank of England Base rate to 3.0% has in turn increased mortgage rates with lenders also taking a more cautious view on offers, including reducing borrowing multiples.

When combined with the ongoing cost of living crisis, this will likely affect affordability and result in a headwind on any future growth in prices. Importantly for developers with units under offer and purchasers already with mortgage offers, it will be critical to stick to development programmes and meet practical completion on time for those units with long stop dates. Nevertheless, most commentators agree that the scale of lack of housing provision in the UK will underpin the market to a great extent going forward. The government’s target of 300,000 new homes is still not being met which will only serve to reinforce this factor.

Investment Zones – “Turbocharging” development?

The government announced (by the then-chancellor Kwasi Kuarteng) the creation of 38 investment zones on the 23rd of September throughout the UK specifically in areas of housing and investment need. The purpose is to drive growth and unlock housing by streamlining planning rules and lowering taxes to kick start development. Specifically, this could include stamp duty relief on residential and commercial development land, no affordable housing/CILS/s.106 requirement, capital allowances, 100% business tax relief and lower national insurance contributions.

Although initially this would be directed at 38 areas of need in England, this planned policy could be rolled out and extended across Scotland, Wales, and Northern Ireland in the future. The measures could provide the financial impetus for development opportunities that otherwise might not be viable and could therefore be an interesting initiative for developers in the coming months.

A further announcement was initially expected in November but politically a lot of water has passed under the bridge since the initial announcement in September.  The proposal, although not cancelled so far, is currently being ‘reviewed’ by Michael Gove the new Secretary of State for Levelling up, Housing and Communities. We could possibly get a further announcement in the Autumn Statement on the 17th of November.

In summary, the months ahead remain challenging from both a cost and value perspective. Nevertheless, with the seemingly ever burgeoning demand for housing and possible government policy initiatives, development opportunities remain. Assetz Capital looks forward to working with developers during these challenging times to work through finance and property issues to help developers achieve their goals.

Assetz Capital have supported thousands of businesses with property funding and through all types of economic conditions. So, if you need development finance to fund your next development, look no further. Give us a call on 0800 470 0430 or email [email protected], our team will be happy to help.