Still trying to make up the shortfall – development in 2022

by Steve Larkin, Head of Development Finance

See our Development Finance rates, contact the team and get your next deal started. 

In many ways, this year was unique, albeit not unique in terms of the development market. 

There remains a significant housing shortage and a lack of new homes being built to meet the necessary demand. A recent analysis commissioned by the National Housing Federation and Crisis from Heriot-Watt University in 2022, said the current housing requirement is close to about 340,000 new homes per year, 13% uplift in the previously mentioned 300,000 figure.

While interest rate rises and the pressure inflation has put on spending power has slowed some house buying activity, the fact remains we are traditionally a nation of homeowners without enough homes to own, which is where SME developers are playing such an important role. 

The obstacles facing SME developers

Developers haven’t had it easy this year. 

The construction issues that have been a recurring factor since Covid continue to impact developments, with material price increases, shortages and lack of access to trained labour still all very real barriers to completing developments. 

We’ve been supporting more with increased facilities, amendments, and Development Exit finance as delays throughout the lifetime of the build have been felt the last few years. 

Despite the economic challenges as well, land values and vendor expectations have not reduced in line with cost inflation, putting pressure on profit margins at the start and end of the builds. 

Preparing for a returning market

The broader economic headwinds have, of course, had an impact. While the housing market in the UK has long remained relatively resilient because of the pent-up demand for properties, the recent increases in interest rates and inflation impacting people’s ability to save and spend, has affected confidence and ultimately transactions. 

Much like with Covid, however, there is a feeling that when this pressure eases the housing market will come roaring back as people desperate for homes return to the market.

Overall this paints a challenging picture for developers, but one that there needs to be a solution to if we are going to hit the necessary targets to deliver quality, secure housing for everyone.

What are the solutions?

In short: lenders being flexible and developers not panicking. 

Navigating challenging times all starts with the developer / lender relationship (the #clientlenderjv as we like to call it) needing to be strong and understanding of one another, their respective concerns, any challenges that may face the deal and having a plan in place to meet those. 

As we’ve shown a lot this year, flexibility is key. Whether it is facility amendments, extensions or transitioning to development exit finance. 

From here, it is lenders who can save their developers unnecessary stress and cost in a challenging selling market who will shine through. 

Being able to move quickly from an acquisition bridging loan, to a development loan, to a development exit will spare developers any additional stress and ensure they are paying the right, manageable interest at every step. 

Fundamentally though, developers want to be building, and lenders need to be willing to back them. The capacity to do that comes from a personal, flexible approach throughout the lifetime of the development, but developers need to know they will be supported. 

Going forward into 2023, confidence of funding and the right experts to support developers will be key as we look to make up the shortfalls in housebuilding yet again. 

See our Development Finance rates, contact the team and get your next deal started.