Blog post
November 1, 2022

Why there’s no need for developers to panic in the current market

If you’re looking to start your next development, reach out to the development team to discuss your project and how they can support you.

by Steve Larkin, Head of Development Finance

You don’t need me to tell you the economy has caused some uncertainty recently; it has dominated the press for months now. 

A lot has been made of the impact on mortgage prices, rents and property values as the economic challenges have continued on, but where do developers fit in all this, and why should they not panic? 

Underlying demand hasn’t changed

What we’ve seen so far in these economic conditions is how house prices haven’t materially fallen. Years of chronic under development means that demand for new properties remains as strong as ever, and the ambition from regions is to get more homes built. 

We see this especially in the North, where cities are trying to attract more professionals with lower-cost housing than in London, while demand in the South East continues to be reliably strong. 

In this context, developers shouldn’t feel like they have to delay plans, because as we’ve seen through Brexit and Covid in recent years the demand for homes is there on the other side of a challenging period. 

Getting land acquisition right

Some of our developer clients we have spoken to over recent months remain calm in the current climate. 

There are good schemes in the market which will deliver crucial housing in key locations, and the provision of money in the development finance space remains as buoyant as ever. 

Securing the land at the right price is the most vital factor at present, and vendors need to be realistic about what the land is worth and more importantly, what a developer is willing to pay for it. 

The combination of rising construction costs and interest margins alongside perhaps the softening (or plateauing) of market prices means the single variable in your development appraisal is the land value; get this right and good developers can continue to build and deliver good quality homes and generate a reasonable return.

Overpaying for land is the single danger all developers face in these current challenging times. 

Read more: Good development lending in a challenging market: Q&A with our new relationship director Lucie Martin

Challenges remain the same

As a result of Brexit and Covid, some of the key problems faced by developers in the past two years have been labour shortages and the cost of materials. 

While the economic challenges of the past few months may have exacerbated the problem around costs, this is nothing developers haven’t been used to dealing with. 

Managing this with flexible, understanding lenders willing to amend facilities or extend loan terms, and by using lenders who can deliver cash quickly with 24 hour drawdowns to take advantage of the current price will make these challenges easier to overcome. 

Finding flexibility

During the first Covid lockdown, lots of near completed or completed projects remained unsold while the market was halted. 

This isn’t the same, of course, but the principles that saw developers through that period can help them now if the market slows as buyers wait to see where mortgage rates settle. 

Development Exit facilities were a gift to developers during covid, and remain that way now if they want to retain completed properties for the next 12-18 months while the market settles. Dev Exit will remain a solution for those at the start of their projects as well, if the uncertainty continues past the next 18 months. 

It is in this climate we decided to restructure our Development Exit products, cutting rates and offering up to 75% LTV on completed residential and mixed-use developments up to £25 million. 

From 0.64%, this means developers can feel assured that they will be able to complete projects and secure their value while they wait for the market to stabilise.

If you’re looking to start your next development, reach out to the development team to discuss your project and how they can support you. 

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