Newmanor Law webinar – Residential development: Lessons learnt from the pandemic
At the end of March, we kicked off the new series of Newmanor Law webinars, aimed at shining a light on current and relevant issues affecting the commercial real estate and development sectors. For each webinar we are inviting experts in the relevant fields to provide our audience with valuable insights, based on their experience of the issues at hand.
Our first webinar focused on what lessons the residential development sector has learned from the pandemic, now the worst of Covid is behind us (we hope). The issues raised also gave us an insight into the challenges that lenders and developers face as we all go into the considerable headwinds caused by the war in Ukraine and inflationary pressures due to soaring energy, gas and food prices.
For this first webinar, joining host James Dakin, co-founder and partner here at Newmanor Law, was a distinguished panel, consisting of: Richard Payne – Director Project Monitoring at chartered surveyors, Adair Andrew Weeks – Associate Director Development at real estate services company, Savills Niall Brown – Managing Director of real estate finance advisory firm, Auxilium Real Estate.
The webinar can be viewed in full here, but below are some of the highlights and a general consideration about the residential development sector in the UK.
Is a hybrid working environment the future?
Throughout the webinar, we regularly polled our audience and the first such poll showed an almost equal split between those who intended to work from home permanently, those who would return to the office full time and those adopting a new hybrid approach to working, combining the two.
It was generally accepted that the housing market delivered significant price increases during the pandemic and now limited stock continues to drive up prices.
Whilst acknowledging the need for flexibility with modern house design, to allow for working from home, the factors for choosing properties remained the same as they have always been; good location, outside space, transport links and good schools.
However, whilst outside space as a requirement climbed to the top spot of buyers’ wish lists, a new generation of buyers will follow on who may have different needs that may include, for some, a complete return to the workplace because they are keen to get back to the hustle and bustle of the City.
Our second poll showed 59% of our audience voting in favour of a home office space over a garage, which could change the design of new housing quite significantly if developers get wind of these transformational trends.
Building costs on the rise as labour shortage improves
Material costs within the construction sector have risen sharply, driven by Brexit, the pandemic and more recently supply shortages, which have only exacerbated the situation. Suppliers, recognising the impact of closed construction sites, wound down their stock levels to a point that has not bounced back yet.
The labour shortage appears to have passed, thanks in part to the return of overseas workers to the UK, post-pandemic. However, things like getting windows to sites to make houses watertight, a crucial part of the construction process, is still proving difficult, thanks to the ongoing supply chain issues and the new need for down payments.
With little stock in the system, manufacturers are mitigating risk in supplying materials by requiring a 50% down-payment, before manufacturing begins. This presents cashflow issues for developers, who require lenders to support the purchase of materials, over which lenders have no real security until the materials reach the site. Ultimately, both lenders and developers are forced to accept the increased risk.
We are beginning to see this supply-chain risk already be factored into lending on the basis that if they don’t, little will be built. Lenders are having to undertake due diligence on materials suppliers; something largely unheard of in pre-pandemic times. This kind of support for developers by lenders can also be a deciding factor in a lender securing a deal as developers are actively seeking funders prepared to fund the purchase of materials.
Connection times for utilities is also a major problem, slowing the completion of many sites. Utility companies want money upfront and will not even agree the connection schedule, until they have been paid. Our co-founder and property partner, Karen Mason has covered this topic further in the media which you can read here [link to KM blog].
The issue of off-road parking for new-build developments was also mentioned, given the increasing need for overnight electric vehicle charging, which is difficult if you can only park 100 yards away from your home.
Despite these problems, it appears new units are selling post-completion, for more than their value in the lending appraisal, with build-to-let now increasingly popular, with developers creating separate investment companies to hold their rental properties. It is these sustained values that have helped to mitigate some of the construction and supply-chain risks developers have been facing.
Cashflow issues leading to rising need for top-up facilities
To meet the challenges facing residential development, the lending market has gone from strength to strength; with increased liquidity, making available new types of funding products and the emergence of new lenders, all combining to improve the current landscape for developers.
Many current transactions have been protected by fixed-price contract terms, typically agreed before the pandemic-inspired problems, which has delayed some of the price-inflation pressures on the larger development sites.
The battle between borrowers and lenders is around contingency, which used to be around 20% and has now dropped to 5-10% to satisfy lenders. Lenders are also imposing more restrictions on how the contingency can be used, slowing the spend down or requiring approval to dip into it.
Despite these challenges, lenders are working hard to get deals done on terms designed to encourage repeat business, whilst recognising that new fixed-price contracts will reflect the ongoing cost inflation.
Will EPC changes impact the rental market?
The Government has outlined the requirement for all new properties for sale or rent, to achieve a C rating or above in their EPC ratings by 2025, up significantly from the current E rating standard. It is expected to introduce capital cost pressures for landlords but expected to impact renters less.
The private rental sector is likely to be less affected, compared to buyers, ensuring there will be no loss of appetite for rental properties, helping drive the build to let market, now favoured by some of the larger property developers and house builders.
Our experts also touched on the modern phenomenon of co-living spaces, often seen as student accommodation for workers who only require a small living space for a few days of the week in expensive areas. This approach is likely to gain more acceptance as we adopt hybrid working.
Our final poll found that supply chain issues were regarded as the biggest issue facing the property development sector in the UK.
It is a worthwhile watch or listen, but we hope these highlights will encourage you to join us at our next webinar on 24 May 2022, when the next topic will be looking at the ‘Future of the Office’