Development: Don’t Drop The Ball

We recently held a roundtable breakfast discussion in the City with surveying and construction consultancy, Adair. Various property professional advisors, as well as developers and funders attended, to discuss current challenges affecting the construction and development industry and to attempt to explore solutions and strategies to maintain the pipeline of new supply we all need. 

The development industry faces unprecedented challenges creating a perfect storm of factors. Interest rates keep increasing, construction costs have gone up and global turmoil has added to uncertainty. The discussion group – which encompassed developers, contractors, property consultants, architects, funders and lawyers looked at how to meet the current challenges and unlock opportunities.

Discussion takeaways: 

• Despite there being plenty of investment money around, lending is often killing schemes as the cost and terms of borrowing versus the potential development profit doesn’t stack up.  There’s still uncertainty in the market post-Trusseconomics but the sector is bouncing back. There is surely the opportunity for new thinking and for more flexible finance products.

• The elephant in the room is risk. We’ve had a series of ‘Black Swan’ events, and everyone is worried that there may be another. As risk is managed, confidence in development will return. Conversations around risk should be taken by parties at the earliest opportunity and could involve a collaborative approach of distributing the risk to enable schemes to work for everyone.

• Are lenders ready for previously ‘struck through’ fluctuation clauses in finance agreements? They can be a realistic acknowledgment of all the development cost variables currently in play and give all parties more ‘skin in the game’; it’s important to grasp that these do not necessarily entail ‘upward only’ ratchets benefitting the contractor. Oversupply following ramped up increased production, inevitably, will balance out and some materials costs must surely be due for serious discounting.

• Some contractors and large investors are not planning on developing any schemes this year as it is too marginal to develop in the current market. Lots of commercial and residential schemes need to improve their energy performance ratings, which will require major upgrades of existing portfolios, so these are challenging times.

• At present, lenders are making every effort to not pull the rug from their customers and HMRC is taking a lenient approach. Relationships throughout all in the development process need to be strong with regular meetings with all involved throughout the life cycle of the scheme. Relationships between client and contractor also need to be stronger.

• Prices of materials continue to drive development costs. Although steel has been levelling off, timber and concrete prices remain on an upward curve. Contingency needs to be built into contracts to factor in these price increases. Or clients need to see, and understand, the risk/opportunity of novel approaches. SME developers, especially, will see agility as a differentiator, and shall see where opportunity lies.
• Development profit margins need to be a minimum of 20% as smaller margins are too risky in the currently volatile conditions. Is there an orthodoxy here that can be challenged? Where is the ‘wriggle room’? (See above about distribution of risk)
• New regulations that require double staircases in tall developments will have major implications for many planned BTR schemes. This threatens the repurposing of existing stock as well as new build schemes; another example of planning being a constraint – albeit understandable post Grenfell. But the market has a habit of finding clever solutions; getting them adopted and passed may be the biggest challenge.
• Delays with the planning process need to be addressed through dramatically upskilling the workforce and devoting more resource. This needs to be addressed at policy level – perhaps some useful intervention by government (for a change)?
•  There needs to be a cultural change in the development sector in order to take advantage of the new opportunities that will be created, and stakeholders can, and should need to adapt to deliver more collaboration, innovation and trust.