Build now and build well to get ahead

As the dust settles on a dramatic year which featured the ongoing conflict in Ukraine, the rapid reversal of the ultraloose monetary policy of the previous decade, and a revolving door at Downing Street, it is a good time to reflect on the what the landscape looks like for housebuilders as we head into 2023.

Related topics:  Construction,  Planning,  Housebuilder
Paul Frost | Puma Property Finance
10th February 2023
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The extreme volatility witnessed in markets in the immediate aftermath of Kwasi Kwarteng’s mini-budget caused all responsible lenders to pause for breath. Rapidly moving estimates of future interest rate rises made it increasingly difficult to appraise development schemes and assess future investment yields with any degree of confidence.

However, just a few months on, the environment is calming quickly. There is talk about the slowing of interest rate rises and indeed the potential for them to reduce in the next couple of years. Accompanying their recent interest rate announcement, the Bank of England highlighted signs that the UK has turned the corner on inflation and the expected recession – if indeed it comes at all – is likely to be shorter than initially thought.

The mainstream media continue their doom-mongering – bad news sells, after all – but from where we were back in the Autumn, there is evidently some cause for cautious optimism. We should remember, of course, that interest rates at their current level are much more in-line with the long-term norm than the rock-bottom rates of the last decade. There will be some pain, but people will adjust. Inflation in the supermarkets may continue to squeeze household budgets, but recent falls in wholesale gas prices, and at the petrol pumps, show that all-encompassing price increases are far from an inevitability.

Property developers are also in a position to benefit from these trends, particularly those who are able to remain nimble and apply fast decision-making in often fluid situations. Labour shortages impacted many construction sites during 2022 but that appears to be easing, as does cost inflation for materials. Overall, the picture is of a more benign environment for property developers over the next year.

For SME housebuilders, their smaller position brings both benefits and challenges. Being generally private companies, they do not face the relentless pressure of the stock market to deliver continually rising profits in the short term and are therefore able to take a longer view. On the other hand, they typically face more liquidity constraints and so often do not have the option to mothball development sites until greater certainty returns to the market.

This is likely to compel them to press ahead with developments now which, in our view, is the right thing to do. The UK remains chronically undersupplied in housing. Those housebuilders who, from conviction or necessity, continue to build, will reap the benefits when the immediate pressures subside.

Our message to builders is to build now and build well. Those developers who have the coverage to press ahead with housebuilding now, and focus on building the sustainable homes that the country wants and needs, will find themselves best placed to benefit from the recovery when it inevitably comes.

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