The property finance challenges of 2023 and the chances offered by a more stable 2024/25
In its final roundtable of 2023, The Business Desk gathered an expert panel focused on residential and PBSA schemes to discuss the challenges faced by property financiers and developers over the last 12 months and the outlook for the next two years.
The key points raised by the panel were:
Lender confidence
Lenders are feeling more confident versus 12 months ago, getting back to the key principles of lending where getting money out of the door is easy. There is strong underlying demand in the housing market with good metrics: an acute housing shortage, good employment and mortgage availability. While housing stock is thought to be substandard in terms of amount and quality compared to most of Europe, the UK currently has its most diverse housing market according to the panel.
However, the industry is adjusting to a new cost of living and cost of borrowing; lenders need to consider the challenges that developers are facing and continue to trade through the decrease in volumes and value. The panel noted that more time is expected to be spent focusing on the deal and the exit - a developer being stuck in a deal if the market shifts and build costs rise would be a very difficult position for all parties.
Build costs
Stability in terms of build costs will be important in 2024. The cyclical nature of the market means it comes back and drops off. The panel expects that the market will plateau and drop slightly in 2024, but the cost of materials and construction will remain the same. Previously, building costs had been recovered through rising sales values which beat cost inflation. As that begins to reverse, there could be issues if costs remain volatile.
Mark Davidson, head of loan management at CrowdProperty, noted that “there’s been a pattern over the last 12-18 months with trading supplies which has been extremely difficult. As funders, we recognise that costs have gone up probably 20-25%” and developers have probably lost much of their labour force. On the bright side, “there’s a difference now from the traditional banks where you used to get your development finance from, to the secondary funders that can be more flexible”.
Planning
Continued frustration is being felt with the planning system slowing down the pipeline, with impacts on the much-needed housing availability and employment prospects for individuals looking to join the sector.
Planning delays are also contributing to the continued frustration of instability and a lack of confidence in the market. Being unable to acquire land with confidence that planning permission will follow puts pressure on developers and their relationships with lenders, meaning offers have been subject to change.
New markets and market entrants
Diversification into PBSA (Purpose-Built Student Accommodation) development and the challenges of moving schemes forward was also covered. Stretched local authority resources have meant a few schemes have struggled to progress. PBSA relies heavily on the intake of overseas students and timing is also a key consideration – if you miss going to market before the end of the academic year, you’ve got a problem.
Smaller developers who are less experienced are entering the residential development market with caution, preferring to be sure the deal is coming in before instructing agents due to GDP, uncertainty and land prices. More experienced developers are confident in their numbers but are experiencing more competition, with the number of bids for potential sites doubling. The land market is more competitive than ever as a result of considerations around food security, biodiversity, environmental issues, energy production and development.
Sustainability
The next phase of the Future Homes Standard is planned to come into force in 2025, placing sustainable development high on the agenda. As always on this subject, it is something of a balancing act: while ‘green’ homes for the next generation are accepted to be a worthy cause and attractive to buyers, the reality is that the additional costs associated with getting these houses up to standard can be limiting. According to the panel, the extra spend and effort of installing solar panels, air source heat pumps and other materials may not be worth the incentives some lenders offer for energy-efficient homes, so the only option is to increase the price per square foot on the sale value or rent to recoup these costs. While some people can afford to pay a premium for the benefits of lower energy bills, many cannot afford to be as sustainable as they want to be.
In summary, people are more confident with the property finance landscape now than in the previous 12 months. As we look ahead to a more stable 2024/25, developers are urged to partner more closely with lenders to navigate economic and market changes.
As we anticipate the Future Homes Standard in 2025, sustainable development takes center stage. The industry acknowledges the need to balance the costs of sustainable practices, and developers are encouraged to explore these opportunities. In this dynamic landscape, we are here to support you – give us a call on 020 3012 0166 if you need help on your property finance journey.
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