Developers are nervous about the year ahead but can see opportunities, which gives them cause for optimism. Although things are expected to be volatile and uncertain, the outlook is not pessimistic. That’s the key message we took from one of our recent round table events, where we invite people from the industry to talk about trends, issues and opportunities. I wanted to share some of the findings with you as I see the Development segment of the market as one where there could be growing demand for brokers.
The housing market
As you’ll no doubt be aware, the government has set itself an ambitious home building target to ease the housing crisis. Rather unhelpfully to the people in charge, their targets and forecasting came under serious pressure last year. In July, a survey by Knight Frank1 concluded that almost 90% of housebuilders believe that construction of 250,000 additional homes a year is the most that can be achieved by 2022, 50,000 short of the government’s 300,000 target.
In addition, The Telegraph reported on 2nd September that the Government’s housing target may be too high after The Office for National Statistics forecasted that fewer new households would be required than had previously been thought. Oxford Economics claimed that the original projections and “hysterical” discussions of the housing shortages had been unjustified.
One thing is clear. While people may disagree about the projections and the number of houses that can be built each year, we all agree on the need for more. This should come as music to the ears of developers, but we found out that things aren’t as straightforward as they used to be.
Planning the economics of a development has become extremely difficult, and this is being driven by two factors. The first is the increasing volatility in material and labour costs. It was reported in September 2018 that building costs had increased by just under 5% over the previous 12 months3. More expensive imported materials and components remained a significant driver of cost inflation, attributable to the fall in the value of Sterling.
Labour costs also continued to rise steadily too, with contractors reporting difficulty in recruiting skilled labour, particularly carpenters and bricklayers. In our round table discussion one developer told a story which brought this aspect to life. He explained that finding reliable bricklayers had become extremely difficult. In one example, he explained that he had agreed a price of £200 per day for a team but they didn’t turn up as they received a better offer from another developer. Eventually, he had to pay £450 per day to make sure he could secure the labour he needed.
Modern Methods of Construction
Modern construction methods have been heralded for their potential to provide high quality housing quickly. The Royal Institution of Chartered Surveyors (RICS) released a paper last year urging the government and construction industry to boost diversity in construction skills by embracing modern methods. In this country we are slow to embrace new ways of building homes, and one developer contrasted this with the European approach where self-build, custom build and developments all use new technology. However, change is coming.
Developers are changing their attitude but this presents a challenge for the lending industry. It was indicated that if modern methods are to be adopted, lenders will need to be convinced that the property is capable of being mortgaged by conventional mortgage providers. Modern techniques can make some lenders nervous as they have to feel confident about the long-term value of the property. As a broker, it is important to keep this in mind when dealing with developers and self-builders.
Brokers and developers at the event talked about the different types of lending model they had experienced. They categorised this as a relationship or transactional model, with some lenders looking to build a long-term relationship with developers, and others lending in a highly commercial way with numbers driving all decision making.
There was concern among developers that lenders employing a transactional approach will be the first to pull away the rug if there is a recession. At Saffron, our aim is always to be as flexible as possible and keep our eye on building long-term relationships. We think it’s important that brokers, developers and lenders work closely together to avoid any surprises and to make sure that everyone buys into the plan. The experienced developers in the room talked about bad experiences in the last housing crash, when they felt that lenders were reacting prematurely.
The Year Ahead
There is great demand for developers to increase the number of properties but the current global uncertainty makes planning difficult. For brokers, the development market could be a buoyant part of the industry but our experience tells us that 2019 could be another volatile year.
1 Knight Frank: Just 1% of housebuilders think government housing targets are achievable
2 The Telegraph: Government plans could overestimate need for new homes
3 Building: Cost update Q2 2018