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Have Property Development and Construction Costs Peaked?
Property developers and construction companies have not had an easy ride as of late. Ever since the COVID-19 crisis hit, the costs of essential building materials have skyrocketed to unprecedented highs. The war in Ukraine took a further toll on already stretched supply lines, making it impossible for developers to turn a profit without imposing their own lofty price hikes.
With the UK facing its worst collective living-cost crisis in recent history, the immediate outlook for the average household is fairly bleak. But there may be at least a small degree of respite on the horizon for builders and property developers, as construction costs are beginning to plateau.
Better yet, there is reason to believe that building costs will begin to decrease going into 2023, enabling developers and construction companies across the UK to kickstart (or restart) their planned projects.
Will the economic downturn trigger a reduction in building costs?
One of the reasons why building costs increased significantly towards the tail-end of the COVID-19 crisis was the simply insurmountable divide between demand for building materials and available supply. Developers and construction companies across the UK raced to keep up with demand, and in doing so completely swallowed up the available contingency of key materials.
Supply lines dried up, availability of essential materials hit rock bottom and prices skyrocketed as a result.
When this happens, many developers and construction companies decide to shelve planned projects or put their existing projects on hold. They simply had no realistic way of generating meaningful profits with such elevated building costs, so they made the decision to wait things out. Their aim was to sit tight until the market returned to some kind of normality, rather than paying over the odds, and reducing the profitability of their projects in the meantime.
All of this seems to be paying off for many, who have already noted a significant reduction in the cost of some essential building materials. Some have even reported that compared to the end of Q2, they are now receiving quotations up to 10% lower on key materials and components.
These reductions in building costs are resulting from two things: A period of comparatively low demand when costs were disproportionately high and the rectification of a broad range of supply chain issues. Key building materials are still not available in the same plentiful supply they once were but are no longer as difficult to come by.
As a result, the manufacturers and suppliers are not able to charge such high prices for them and low prices are gradually trickling through to property developers and construction companies.
In forwards into 2023
Of course, putting too much stock into what is happening (or appears to be happening) right now may not be advisable. The events of the past few years have taught us that nothing is set in stone, and we have no idea what may be around the next corner.
As the crisis continues to escalate in Ukraine, it is perfectly plausible that major supply chain issues could once again cripple the UK’s property development sector.
Even so, the consensus seems to paint a picture of a slightly more stable and predictable future for the industry as a whole. Building material, component and labour costs may remain elevated indefinitely but are unlikely to hit the same kinds of peaks as those experienced at the height of the COVID-19 crisis.
Property developers and construction companies are exercising greater care and caution than ever before, and in today’s turbulent climate are unwilling to take the kinds of risks they would once have happily accepted as the norm.
What Buy-to-Let Landlords Expect from Their Brokers
Times are changing, and the buy-to-let landscape is becoming increasingly difficult to negotiate.
On one hand, successful BTL investors are reaping the windfall of record-high monthly rents, coupled with long-term capital gains. On the other hand, the withdrawal of countless tax incentives and the growing costs of running a BTL business are driving many established landlords out of the market entirely.
Just as some are racing frantically to buy up as many rental properties as they can to generate generous rent yields, others are liquidating their entire portfolios.
With changes to the BTL landscape come changes to the priorities of landlords and investors when working with mortgage brokers. Independent brokers continue to play an important role in pairing BTL investors with affordable loans and mortgages and overseeing their transitions when remortgaging.
Through consultations with countless landlords, the priorities of BTL property buyers when dealing with brokers in the current climate have become clear. The prominent examples are as follows:
- Paying close attention to long-term interest rates
One of the many lessons learned over the past couple of years is that certainty is a redundant concept. Irrespective of how safe and stable your financial position may appear, you have no idea what is around the corner. This is why a growing number of BTL investors have been setting their sights on longer-term 7-year and 10-year fixed-rate mortgages as a way to at least modestly manage long-term uncertainty.
Brokers are therefore being expected to focus more heavily on long-term interest rates than ever before, as opposed to short-term introductory deals.
- Strong focus on speed and simplicity
Sidestepping the usual complexities and complications is also a top priority for investors in today’s fast-paced market. Reliability and speed of service are fundamental expectations for BTL landlords and investors who want to know that their deals will be done and their transactions completed before any further market fluctuations. In such dynamic times, there simply isn’t room for the kinds of loan applications and property transactions that can take as long as three months to process.
Particularly where competition for high-demand properties is concerned, landlords expect the kind of broker support that puts them right at the front of the queue.
- Independent advice and expertise
The role of the specialist broker is no longer to simply compare the market for the best deals and negotiate the lowest possible rates on BTL products. Instead, it is to act as a trusted advisor and a fully independent intermediary, able to help BTL landlords and investors make all the right decisions in the first place.
And of course, all such advice and input are expected to be offered free of charge to the client.
- Honest and transparent communication
BTL investors and landlords (along with most private and commercial customers in general) now expect nothing but complete honesty and transparency from their brokers. Clear and consistent communication holds the key to good business-client relationships, but it continues to be overlooked by many mainstream providers. Serving as fully independent intermediaries, brokers are trusted to be as brutally honest as needed to ensure their client’s best interests are upheld. No false promises and no overestimating of their own capabilities; 100% honesty and openness from start to finish.
Only then can the client trust the broker to guide them through some of the most important purchase and investment decisions they will ever make.
How Are Bridging Loans Being Used in the Current Market?
A recent spike in bridging finance activity has seen loan volumes once again come close to pre-pandemic peaks. Even in times of economic uncertainty, bridging finance continues to serve as an affordable and attractive alternative to conventional high-street loans.
Equally, the growing availability of bridging loans is broadening the appeal of responsible short-term borrowing to a more diverse audience than ever before. There are more independent specialists offering bridging loans in the UK than ever before, spurring the kind of competition that has brought average monthly interest rates to all-time lows.
But what are the specific applications that bridging loans are currently being used for? What are the most popular uses for bridging finance in the UK as of Q4 2022?
Investment property purchases
For some time now, the most common application for bridging finance has been purchasing investment properties. Ferocious competition in the UK housing market is prompting more investors than ever before to seek fast-access funding for time-critical property purchase opportunities. Bridging finance provides new and established investors alike with the opportunity to beat competing bidders to the punch and to purchase properties that would not be considered eligible for a conventional mortgage.
Chain break
The latest figures from Bridging Trends suggest that the second most common application for bridging finance as of right now is funding chain breaks. This is where homeowners looking to relocate effectively use bridging finance to become cash buyers. They borrow against the equity they have tied up in their current home; the funds needed to purchase their next property are released within a few days, and the transaction is wrapped up as promptly as possible. Property chains have become increasingly complex and fragile as of late as competing bidders go to extremes to beat their rivals to the punch.
Light and heavy refurbishments
Another popular use for bridging finance is funding light and heavy property refurbishments. Homeowners, for example, often take out a bridging loan to cover significant improvements to their properties before listing them on the market for their maximum value. Elsewhere, investors looking to flip homes for profit routinely use bridging finance to fund their projects before selling their properties for the biggest possible profit. As bridging finance is designed to be repaid within a few months, it is ideal for short-term undertakings like these.
Auction purchases
Purchasing properties at auction can pave the way for significant savings. It is not uncommon for homes and business properties to sell at auction for less than £50,000, making them ideal as ‘fixer-upper’ projects. But as the full balance on auction property purchases needs to be paid within 28 days, no conventional mortgage or property loan is viable. Bridging finance, which can be organised and accessed within a few working days, has become the go-to for many thousands of people looking to pick up bargain properties at auction.
Business purposes
Business owners looking to cover time-critical gaps in their finances have been turning to bridge finance specialists in record numbers. Bridging finance is uniquely flexible and accessible, with no specific limitations on how the funds can be allocated. From purchasing stock to upgrading business equipment to covering staff wages and tax bills, bridging finance has a broad range of applications for business owners and SMEs. It can also be secured against a wide variety of assets of value, making it more accessible than many comparable types of secured business loans.
Small-Scale Property Development FAQs: Key Questions Answered
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- What qualifies as a ‘small-scale’ development?
The designation ‘small-scale’ in relation to property developments does not actually have a clear or formal definition. Even so, most regard a small-scale development as one that is made up of around 5 to 20 units (such as flats), capable of generating a profit of say £100k to £500k over a period of 18–to 24 months.
- Are small-scale development projects comparatively simple?
Compared to large-scale development projects, the answer is yes. Small-scale developments tend to be less complex and labour-intensive. But when compared to a standard flip or refurb, even a small-scale property development project can be a much more extensive undertaking. Costs are significantly higher and the scope of the work is greater, calling for the involvement of a knowledgeable and experienced project manager.
- What are the most profitable small-scale development projects right now?
It depends entirely on your knowledge, experience, expertise, budget, and location. Even so, conversion projects (where existing properties are repurposed) tend to be the preferred option for new and aspiring developers. Across the UK, there is a huge and growing contingency of abandoned and unused commercial buildings with enormous potential for residential conversions, many of which have the potential to be exceptionally lucrative.
- Are first-time developers inherently at a disadvantage?
Yes, at least when it comes to funding their first property development project. This is due to the fact that many specialist development finance products are issued exclusively to experienced developers with an established track record. Many lenders exclude first-time developers from consideration, reducing the number of viable funding options available. Even so, it is perfectly possible to fund almost any type of small-scale development project with a bridging loan, a secured commercial loan, or any other viable commercial mortgage.
- How difficult is it for new developers to qualify for funding?
Newcomers to property developments looking to get their first projects on the ground are strongly recommended to seek independent broker support at an early stage. An experienced broker can help pair your requirements with an appropriate lender while at the same time negotiating on your behalf to ensure you get an unbeatable deal. In addition, your broker will help you prepare a strong and convincing application, increasing your likelihood of qualifying for the funding you need.
- Is it not cheaper to apply for funding directly with a lender?
No, and for two important reasons. Firstly, brokers know exactly how to negotiate the kinds of deals that would not be accessible directly from any lender. They also have established relationships with lenders that can lead to significantly reduced borrowing costs and lower fees. In addition, many development finance specialists offer their services exclusively via broker introductions. This means that many of the best deals on the market may be completely inaccessible if you do not apply with the help and support of a broker.
- How are development finance loans issued and repaid?
Specialist development finance differs from bridging loans and other commercial mortgages in that the funds are transferred in a series of instalments. The release of each instalment is tied to the completion of a specific phase of the project, overseen by a surveyor (hired by the bank and paid for by the borrower). Most development finance loans are designed to be repaid within 6 to 24 months, during which interest accrues on a monthly basis. The full balance is either repaid upon the sale of the completed development or by transitioning the loan to a longer-term repayment facility (like a buy-to-let mortgage).
Do Lenders Have the Right to Withdraw Mortgage Offers?
With the economy going into free fall and the housing market in chaos, Kwasi Kwarteng’s mini-budget has done little to appease the fears of buyers and lenders alike.
The Bank of England has stated that they “would not hesitate” to increase the interest base rates yet again in an attempt to protect the falling value of the pound. Unfortunately, this will lead to the inevitable result for mortgage lenders, who predict that offering competitive interest rates to customers will be far too expensive.
With this in mind, people have many questions regarding the future of the mortgage market and what it means to them. Today we answer a few of these questions.
Will my lender withdraw my mortgage offer?
This is a question paramount to every buyer’s mind who has already been offered a mortgage deal by their lender. In principle, lenders will abide by the offer they have made, according to most brokers. So to answer the question, yes, lenders will honour any offer already agreed upon.
Unfortunately, buyers, first-timers, and movers who have not already made an application will find that the offers available to them will be limited and significantly more expensive.
The previously good mortgage deals have been removed, and when new offers make a re-appearance, it will be considerably less of a “deal” and markedly more expensive.
If your application for a good deal is complete, then you are likely to be lucky enough to have secured a specific rate; however, if it is just “agreed in principle,” the likelihood is that the rate offered is not binding and therefore can be withdrawn by the lender.
It is important, however, to note that if you are already on a deal with a fixed interest rate, the lender cannot change the rate until the deal expires.
Will my home be repossessed?
With many fixed rates coming to an end and an almost certain increase in monthly mortgage repayments, many homeowners are asking themselves if their homes could be repossessed. Although this is a possibility, the whole process of repossession is lengthy for lenders and one they will try to avoid.
It’s more likely that a lender will offer some sort of payment plan for those struggling with their monthly mortgage repayments.
If you are or feel you may, in the near future, not be able to meet your payment obligations, it is imperative that you seek help and advice. There are various charities, such as Citizens Advice, that are there to offer any support you may need.
What support can we expect from the government?
Following the pandemic, we have become somewhat accustomed to the government handing out support in various ways, for example, through furloughs and grants. Unfortunately, this will not be the case for homeowners struggling to pay their mortgages.
Instead, they will be doing what they can to get the economy back on track, although to date they have not been too successful in this endeavour.
Will renters be affected?
Well, mostly, yes. If landlords find themselves paying higher buy-to-rent mortgage payments, they will have little choice but to pass at least some of these increased costs onto their tenants.
Another side effect of the market chaos is a shortage of rentable properties, should landlords decide to sell up. With demand higher than supply, an inevitable increase in rental rates will be unavoidable due to the increased competition.
Renters who wish to get their foot on the property ladder will most likely need to wait longer to buy due to first-time mortgages being so expensive.
Why is the Bank of England increasing interest rates?
The theory is that by increasing base rates, people will be less likely to borrow and spend and more likely to save. This hopefully results in less demand for products and services, which in turn will result in prices going down.
With inflation at five times its target rate, the Bank of England is expected to keep increasing interest rates in order to get control over the spiralling inflation rate.
Although in theory, this should work, it is a balancing act that needs to be executed well, as we do not want the economy to slow down too much.
Do mortgage interest rates always fluctuate?
Yes, but we need to consider some factors, such as the fact that for the last decade, interest rates have been relatively low. Now that rates are on the rise, it has been a shock for many that even a small rise in rates has translated into quite significant rises in monthly payments. This is largely due to the amount buyers have borrowed due to high house prices and stagnant wages.
How will the rise in rates affect my mortgage?
The rise in base rates will result in mortgages becoming significantly more expensive. This will in turn have a negative effect on housing market activity, as buyers will be more hesitant to act now and will be more likely to be waiting to see what the future holds.
Should the rates stay high for a long period of time, mortgages will become unaffordable, many will sell, and house prices will inevitably decrease.
Lloyds Announces Closure of Another 66 Bank Branches
With more customers taking their business online than ever before, major Banks are being forced to rethink their presence on the High Street. Following a raft of recent closures, Lloyds Banking Group has confirmed plans to permanently close a further 66 bank branches by the end of the year.
According to Lloyds, 19.1 million of its customers now use online banking, and around 15.6 million people manage their affairs via the bank’s mobile app. Foot traffic at the bank’s physical branches has been decreasing steadily for some time, resulting in the decision to close another 48 Lloyds sites and 18 Halifax branches over the coming months.
According to Lloyds, the bank has seen a 60% fall in overall branch visits by customers over the last five years, increasing to as much as 85% in some parts of the UK.
However, Lloyds was keen to emphasise the closures will not result in any voluntary or involuntary redundancies, and that all staff members affected will have the opportunity to transfer to different parts of the company.
Lloyds Banking Group will maintain a comparatively strong presence on the UK High Street, with 646 Lloyds Bank, 510 Halifax and 165 Bank of Scotland branches set to stay open for the time being.
Full List of Closures Confirmed by Lloyds
The full list of Lloyds Bank and Halifax locations set to close during the winter is as follows:
- Lloyds, Bromyard
- Lloyds, Chigwell
- Lloyds, Catterick Garrison
- Lloyds, Malvern Link
- Lloyds, Redruth
- Lloyds, Lutterworth
- Lloyds, Palmers Green
- Lloyds, Cheadle
- Lloyds, Lytham St Annes
- Lloyds, New Ollerton
- Lloyds, Paternoster Sq, London
- Lloyds, Earls Court Rd, London
- Lloyds, Leadenhall St, London
- Lloyds, Axminster
- Lloyds, Barton upon Humber
- Lloyds, Belper
- Lloyds, Intake, Sheffield
- Lloyds, The Moor, Sheffield
- Lloyds, Tilehurst, Reading
- Lloyds, New Romney
- Lloyds, Edgbaston, Birmingham
- Lloyds, Wooley Castle, Birmingham
- Lloyds, Billericay
- Lloyds, Immingham
- Lloyds, Tonbridge
- Lloyds, Edgware Rd, Paddington, London
- Lloyds, Notting Hill Gate, London
- Lloyds, Sandbach
- Lloyds, West Wickham
- Lloyds, Darlaston
- Lloyds, Purley
- Lloyds, Aldridge
- Lloyds, Rothbury
- Lloyds, Wootton Bassett
- Lloyds, Guisborough
- Lloyds, Cheddar
- Lloyds, Cinderford
- Lloyds, Cleo bury Mortimer
- Lloyds, Holyhead
- Lloyds, Wallingford
- Lloyds, Bishop’s Waltham
- Lloyds, Helston
- Lloyds, Looe
- Lloyds, Lewthwaite
- Lloyds, Welshpool
- Lloyds, Pwllheli
- Lloyds, Caldicot
- Lloyds, Llandrindod Wells
Halifax
- Halifax, High Holborn, London
- Halifax, Hitchin
- Halifax, Ripon
- Halifax, Stowmarket
- Halifax, Newry
- Halifax, Whitchurch
- Halifax, Dorking
- Halifax, Mitcham
- Halifax, Retford
- Halifax, Tiverton
- Halifax, Tottenham Ct Rd, London
- Halifax, Windsor
- Halifax, Stroud
- Halifax, Ruislip
- Halifax, Birmingham
- Halifax, Rawtenstall
- Halifax, Coleraine
- Halifax, Warminster
Commenting on the closures, the director of consumer relationships at Lloyds Banking Group, Russell Galley, said that the decision reflected the shifting trends and priorities of the bank’s UK customers.
“Our customers have more choice than ever in how they bank with us. As our customers do more online, visits to some branches have fallen by as much as 85% over the last five years,” said Galley.
“Alongside our digital, online and telephone services, we’ll continue to invest in our branches, but they need to be in the right places, where they’re well-used.”
Elsewhere, Lloyds Banking Group has faced heavy criticism from trade unions and consumer groups, which have accused the company of both putting jobs or risk and leaving some communities with no convenient access to banking.
In total, more than 5,000 bank and building society branches have closed across the UK since 2015, according to trade union Unite.
Homes England Falls Short of Housing Delivery Targets Once Again
England’s escalating housing crisis shows no sign of abating anytime soon, as Homes England is once again short of meeting any of its housing delivery targets. The figures in the agency’s 2021/22 annual report and financial statements make for a disappointing reading, with just 26,953 out of a planned 34,349 affordable homes having been successfully built.
In total, Homes England fell 15% short of its aim to build 44,275 new homes this year, having successfully constructed 37,632.
Pointing the finger of blame squarely at labour shortages and material procurement issues, Homes England said unexpected discrepancies had increased home delivery times by around 20 weeks on average.
“Capacity issues in the planning system, nutrient neutrality challenges, and material and labour shortages with increased associated costs have caused delays to housing provisions, impacting the agency’s delivery against its KPIs,” commented Peter Denton, CEO at Homes England.
The agency also failed to meet its unlocked housing capacity target, unlocking 58,993 homes through infrastructure and land, 38% fewer than its goal of 94,863.
Homes England also said that the shortfall was attributed in part to several key infrastructure programmes reaching the end of the funding deployment phase and moving to portfolio management.
“Our affordable homes programmes are a core contributor to our completions, and over the past year, partners have reported challenges in delivering completions,” read an extract of the report from Homes England.
“This has mainly been due to delays and access to labour supplies and materials. Schemes approaching completion were more directly impacted by labour and material shortages because it is at this stage where the need for resources is greatest.”
“Delays added c. 20 weeks to delivery times, reducing capacity to complete homes in the original timeframes.”
A brighter outlook ahead?
A brief summary of the targets set out by Homes England and the agency’s actual performance can be seen in the table below:
|
KPI |
2021/22 actual |
2021/22 Target |
Difference |
% away from hitting the target |
|
Completions directly supported by Homes England |
37,632 |
44,275 |
6,643 |
15.00 |
|
Completions directly supported by Homes England (additional to the market) |
25,279 |
30,922 |
5,643 |
18.25 |
|
Affordable, completed homes supported by Homes England |
26,953 |
34,349 |
7,396 |
21.53 |
|
Starts supported |
38,562 |
48,810 |
10,248 |
21.00 |
|
Unlocked housing capacity |
58,993 |
94,863 |
35,870 |
37.81 |
Source: Homes England annual report and financial statements
Despite the disappointing performance for 2021/22, Peter Denton reaffirmed the agency’s commitment to further expansion and enhanced regeneration going forward.
“This means we will not only deliver the homes this country needs, but we will also work with partners to revitalise run-down and derelict sites in order to bring confidence, pleasure, and pride back to our town centres,” he said.
“With a renewed focus on regeneration, a more place-based way of working will be central, bringing together all our tools and capabilities to support local leaders to deliver their vision for their towns, cities, and rural communities.”
“While boosting housing supply across England remains an important focus for the agency, our role is increasingly about more than making homes happen—it is about creating sustainable, thriving places that foster a sense of community and pride and can better connect people to employment opportunities and provide the amenities they need.”
Planning Permission Applications Down Once Again in Q1 2022
The lack of inventory in the UK’s prohibitively expensive housing market shows no signs of abating soon. According to the most recent figures published by the Department for Levelling Up, Housing, and Communities (DLUHC), just 84,000 of the 109,900 applications for planning permission submitted in Q1 this year were granted.
This equates to an 87% success rate for planning permission applications submitted during this time—down 4% compared to Q1 2021. This may sound less than significant, but it comes at a time when the UK is in dire need of a major uptick in affordable home availability.
In addition, the total number of planning permission applications received for the quarter was down 12% compared to the previous quarter.
A total of 9,300 residential planning permission applications were granted in England in the first three months of the year, a 6% decrease compared to the same time last year. 1,900 commercial planning permission applications were granted. Down 2% from Q1 2021.
Affordable inventory is urgently required
The dire need for rapid acceleration in the housebuilding sector was highlighted by Paul Neal of Missing Element Mortgage Services, who emphasised the importance of focusing on the availability of homes for people who actually plan to live in them.
“Not stock that is snapped up by landlords or builders to make a fortune on. Reliable, affordable housing for everyday people,” he said.
“Sadly, it’s not coming at anywhere near the pace it needs to, and planning is often the issue.”
Speaking on behalf of London-based property developer New Place, managing director Joe Garner said that the DLUHC data provides a clear indication that nowhere near enough homes are being built in the right places.
“The planning system is an absolute mess, and political infighting from central government all the way down to local councils is perpetuating the housing crisis,” he said.
Garner’s sentiments were echoed by Jamie Lennox, director at Norwich-based mortgage broker Dimora Mortgages, who likewise said that the government is not even coming close to meeting its own house-building targets.
“Many developments get stuck in planning for years, and until there is a quicker process to get sites approved, the ambitious plans for a certain number of new homes won’t ever materialise,” he said.
Help to build push continues
Meanwhile, the government continues to push its Help to Build scheme as a potentially affordable alternative access point to the UK housing market.
Help to Build provides those looking to build their own homes with the opportunity to access a special mortgage of up to £600,000, which can be secured with a deposit of just 5% and offers the first five years interest-free. This 95% LTV mortgage will only be available through a selection of approved lenders, and the scheme is being managed by Homes England.
“Through the Help to Build scheme, we will help thousands more people onto the property ladder by giving them the opportunity to build homes that are perfectly tailored to their needs and in the communities they want to live in,” said Housing Minister Rt Hon Stuart Andrew.
“This innovative scheme will build on our work to break down the barriers to homeownership, as well as create new jobs, support the construction industry, and kickstart a self- and custom-build revolution.”
Open to movers and first-time buyers alike, Help to Buy combines low initial deposit requirements with five interest-free years, followed by a 1.75% APR in the sixth year and incremental annual increases thereafter.
“Self-build isn’t the preserve of the wealthy, and Help to Build makes it more practical and accessible than ever before for people to build their dream home,” said Andrew Craddock, Darlington Building Society chief executive.
“This scheme also opens up opportunities for first-time buyers. It is a fantastic example of the market moving with the times and people’s changing wants and needs.”