PLANNING IN ADVANCE IS PIVOTAL.
DEVELOPERS RISE TO THE CHALLENGES OF A RAPIDLY CHANGING WORLD.
As euphemisms go, “roller-coaster ride” probably doesn’t begin to do justice to the unprecedented peaks and troughs experienced by the specialist finance industry over the last 18 months. The development sector has felt the full force of these confidence swings as keenly as any area of the market, as first Brexit and then Covid arrived in rapid succession, and anyone hoping for quieter times ahead will most likely be disappointed!
As we head into summer, the dark months of December and January suddenly seem a long time ago, with housebuilding, commercial development, infrastructure projects and home DIY all booming as we steadily emerge from our third national lockdown. With a glut of liquidity, the lender rate war has also resumed with a vengeance. Throw into this mix government stimuli such as relaxed planning rules, together with furlough and the stamp duty holiday which have yet to end and it’s not hard to see why the UK construction sector is growing at its fastest rate in over 6 years.
Indeed, May’s Purchasing Managers Index (PMI) data not only confirmed output growth at its strongest since September 2014, but it also showed new order volumes growing at their fastest pace since the monthly survey began over 24 years ago. If all this seems too good to be true, it’s because it probably is. As usual in life, there is a sting in the tail!
MATERIAL COSTS RISING AT THEIR FASTEST PACE SINCE 1997.
Unprecedented demand for raw materials, not just in Britain but across the globe, has resulted in a materials shortage compounded by the dramatic decline in production in early 2020. The Chief Executive of the Master Builders Federation, Brian Berry, recently stated: “We can’t build our way to recovery from the pandemic if we don’t have the materials.”
Of course, the laws of supply and demand are further exacerbating the problem, with shortages giving rise to sharp price increases. By March 2021 building materials had increased by 7-8% compared to a year earlier with timber prices up over 50% and steel 17.6%. Cement is up 30% in recent months and paint by a similar amount. From chipboard to screws, electrical components to sanitaryware, prices are going up almost as fast as lead times!
EXTRA HEADROOM IS INVALUABLE.
Price rises are not just restricted to materials either. Labour rates have skyrocketed in some areas, particularly where Eastern European workers went home after Brexit. The net result of all these factors for developers is that now, more than ever, it is harder to accurately schedule works and to project build costs and cashflow. Contingency funds of up to 10% of total build costs are now more common but even then, uncertainty can still surround the developer’s budget and whether it’s sufficient to get the scheme built.
This is the point at which the best brokers and specialist development lenders come into their own. At Pivot we move quickly to analyse the viability of every single development enquiry we receive, large or small, by working collaboratively with our brokers and developers. Our origins as a successful developer means we can offer a unique market insight to our partners.
COLLABORATION IS KEY
We have all learned a great deal since March 2020, not least of all the increased sensitivity around timelines. With second fix supplies in short supply, stock now needs to be ordered up to 6 months in advance to ensure the continuity of a build and with costs changing daily, certainty of funding is more key than ever.
As a lender we are known for our market knowledge, the strength of our analytical skills and for our use of cutting-edge real estate software. It is this attention to detail, our understanding of different geographies, of planning legislation, of the new commercial into residential permitted development rights (PDR), of air space deals and so much more that enables us to write deals others will shy away from.
In a world where some lenders seem to think that funding one light refurbishment scheme qualifies them as a development expert, the value of working with a lender that genuinely understands the space should never be underestimated.
With the imminent end of government support schemes, ongoing concerns about Covid mutations, lengthened supply lines, congestion at the ports and so much more to add into the mix, the value to developers of working with the very best brokers and lenders is clear. Together in partnership we can plan and build our way to success.