August and September material inflation remains a concern with many developers still experiencing pressure where fixed price contracts have not been entered into. This remains particularly pertinent for smaller developers where pre-orders and materials quotes are held for relatively short periods before being requoted at a higher price. This is obviously having an impact on CTC on some sites but in most cases is still being covered by contingencies. The latest available ONS figures for materials inflation for housing remains at 12.3% p.a, although the rate of increase has eased slightly, indicating that materials inflation may be peaking.
Secondly, materials availability particularly in relation to bricks, concrete blocks, and steel among others has eased slightly in most areas, linked to the adjustments in supply chains and shipping following the Ukraine crisis. Heavy reliance on externally imported materials in the UK remains and the recent global developments have exposed how fragile the supply chains are. What does this mean on the ground? Most developers I am talking to are now stating that material availability is returning and most materials can be obtained in a timely manner but at a price.
Nevertheless, there are also signs on most development sites that increases in labour costs are now starting to creep into development costs. This has had a twofold impact, cost of labour and the financial impact of delays caused by lack of available skilled workers on the programme timing. This applies to nearly all skills but particularly in relation to joiners, electricians, concrete, steel and other highly skilled roles. This is likely to ease slightly since the return of schools in September with an end to the seasonal drain on construction labour but even so, labour shortage is likely to remain an issue for most developers going forward.
The Market.
In relation to the residential market, prices at first glance appear to be holding up with Nationwide Anglia reporting a 0.8% increase in August, representing an annualized growth of 10%, down from 11% in the previous month but nevertheless, an increase! However, this increase may be reflecting deals that were struck earlier in the summer and therefore it will be interesting to see the next monthly figures which may more closely reflect the effects of recent hikes in the Bank of England interest rate to 2.25% and household energy cost pressures. This will be a test of how robust the market really is. There are also significant variations in performance over the UK with the regions in general outperforming the traditional larger conurbations. Particularly strong annualized growth was observed in Wales and the Southwest.
The market in general remains tight with a definite continued lack of supply on the one hand and with a reluctance of purchasers to commit with the current ever changing economic backdrop.
At the coal face on site for the moment, clients are still reporting reasonable interest for many schemes with sales particularly focusing on premium products still holding up. However, one or two developers are bringing forward their marketing campaigns well in advance of practical completion and I have also seen a change in strategy for clients preferring the sales exit rather than build to rent and refinance. It remains to be seen if the recent changes in stamp duty at particularly at the lower end of the market will help improve this Mexican stand-off in the residential market.
With both constant shifting sands in development costs and GDV combined with the current economic backdrop, the next months will likely be challenging. However, with close monitoring of the sites we hope to work closely with and assist clients at every stage of the development process.
If you are looking to fund your next development project, Assetz Capital can help. Give us a call on 0800 470 0430 or visit the development finance page of website for full details and a downloadable product guide with criteria.
