The Inexorable Rise of Development Costs!
It is interesting to note that the construction sector slowed slightly in the first month or two of 2017, despite a buoyant housing market (agents in our locality are reporting rising prices and a shortage of stock). So why is this?
We think that there are two factors involved;
1. Weakness of sterling. A large part of materials used in UK construction are either sourced from abroad, or are made in the UK from raw materials sourced from abroad. As sterling buys fewer dollars and euros, the cost of these materials has gone up, and is being reflected in build costs. For land acquisitions already made, this tends to narrow the margin between sale prices and costs – in other words narrows the profit margins to developers.
2. Buoyancy of the property market – on the face of it this is a good thing for our sector. Rising prices and strong demand inspires confidence amongst developers as completed schemes are easier to sell at more predictable values. However, the converse is that such confidence (sometimes overly inflated confidence) leads to higher demand and higher prices for development land, and profit margins fall. In fact it is fair to say that in rising property markets, development schemes are perceived as lower risk and profit margins tend to fall more generally. In the recession post 2007, margins of 25% to 35% were not uncommon. Now margins of 15% to 20% are starting to look the norm.
Therefore, despite the bullish property market, the combination of the two factors above may well be squeezing margins and making some schemes less attractive, especially for larger schemes that are on narrow margins in any case. One would hope that further rises in values will act as a counter to these issues. As a further comfort to developers, the competition from lenders for your business is growing steadily, and we continue to see a reduction on costs of finance for development, so some offset against other rising input prices can be gained.
Here at Yorkshire development finance, we keep up to date with the latest options and trends in the development finance market, and will seek to ensure that we identify the best deals available for you needs.