Brian West looks at the challenges and opportunities 2024 offers for the development finance sector.
“Building is about getting around the obstacles that are presented to you.” More famous for his roles in the Avengers and Mission Impossible franchises, the above quote by Jeremy Renner reveals a lesser-known side to his life, one where he is the co-owner of a house-
renovating business with his best friend! Renner has clearly learnt through hard graft that no
construction project is going to be without its challenges. Careful planning, collaboration and diligent monitoring can mitigate some risks but ultimately many developments, to be a real success, will also need a slice of luck.
UK construction endured some very challenging economic conditions during 2023, not least of all the impact of high inflation. This really began to bite with the pain felt by developers and contractors as, further down the supply chain, consultation fees, materials, labour costs, energy prices, equipment rental rates and pretty much anything else you can think of increased in cost. It’s a hard one to prove but justified price increases were probably, and sadly, matched by opportunistic ones.
Little wonder then that the number of starts fell sharply as developers focussed on building out their existing sites rather than opening new ones. Slowing new house sales cast a further shadow over the market as did the perennial and increasingly exasperating problem of planning delays. Our planning process is creaking at the seams. Increasingly erratic, under-resourced and burdened by red tape some planning departments are taking 8 weeks to validate applications let alone determine them!
As if the frustrations of planning weren’t enough many more potential developments were hit by much less publicised, but equally frustrating nutrient neutrality concerns. Add to this, suppliers increasingly demanding up-front payments, skills shortages and a constantly evolving regulatory environment and its clear just how tough things were last year. The challenges of a “speculate to accumulate” cashflow model have rarely been felt so keenly.
Thankfully, despite all the above, the development sector seems to have entered 2024 in a more positive mood thanks to some long awaited, but admittedly fragile, stability. Inflation is falling, mortgage rates have reduced in recent weeks and long-standing supply chain issues continue to ease.
At long last macro-economic factors are moving in the right direction making all the historic
frustrations just a little easier to bear. Developers, contractors, and lenders will all continue
navigating a complex landscape with many obstacles to be overcome, but crucially there are still some great opportunities out there for SME housebuilders and developers.
Opportunity knocks...
Whilst interest rates are predicted to remain at or near current levels for the remainder of the year, weaker house prices, tax breaks ahead of the General Election, high levels of employment and the continued rise of nominal average earnings should hopefully lead to an improvement in housing affordability. Consequently, it’s likely we’ll see a recovery in housing starts this year and next as developers respond to growing consumer confidence and a strengthening property market.
Within a generally improving market there are likely to be specific types of development that thrive with one of these being build-to-rent, underpinned as it is, by record demand levels for rented homes. Traditionally a sector that’s popular with young professionals and one favouring city centre locations, it’s estimated that to keep pace with demand we will need a million new rental properties by 2031.
Linking directly into the above, the city office market is challenging with the cost of renovating many older offices to the required EPC standards being prohibitively expensive. An estimated 60% of offices currently don’t achieve the Band C rating required by 2027 so this is likely to encourage a further surge in commercial to residential conversions with many of these units being produced for the rental market.
More generally there is growing investor and consumer interest in sustainable and environmentally friendly housing projects, growing demand for affordable and social housing, government driven growth in urban regeneration and infrastructure projects and rebounding demand for warehousing and logistics developments as the cost-of-living crisis relents and retail spending increases.
Opportunities exist for those that can navigate a successful path around the obstacles Mr Renner, aka Hawkeye, alluded to in his quote above. Projects in 2024 will, more than ever, require a forensic assessment of risks and opportunities. Developers, contractors, and lenders alike, will all need to stay agile, adapt to economic and regulatory changes and ensure their risk management and monitoring processes are top drawer. Do this, enjoy a little bit of luck along the way, and 2024 could end up being a great year.
Brian West (08/02/2024)