"Stricter building regulations, environmental assessments, and protracted planning application processes all contribute to higher upfront costs and longer project timelines. These factors can be particularly detrimental to firms with limited resources and cash flow"
- Steve Perrett - Innovus
The UK property development landscape has undergone a significant shift since the 2008 financial crisis, with smaller property developers, in particular, facing increasing challenges and a noticeable decline in their numbers. While larger, well-capitalised firms have largely weathered the storm, smaller players have struggled to navigate complex and often volatile market conditions.
One of the key factors contributing to this decline has been the increased difficulty in securing financing. Following the 2008 crash, banks became significantly more risk-averse, tightening lending criteria and demanding higher levels of equity from developers. In 2020, small and medium-sized enterprises (SMEs) accounted for only 10% of new homes built in the UK, a significant decline from nearly 40% in 1988.
Increased regulatory burdens and planning complexities have added to the challenges faced by smaller developers. Stricter building regulations, environmental assessments, and protracted planning application processes all contribute to higher upfront costs and longer project timelines. These factors can be particularly detrimental to firms with limited resources and cash flow.
In recent weeks, the Government has introduced several new initiatives aimed at alleviating these issues and supporting its Plan for Change of delivering 1.5 million homes across the country. The best way to summarise the policies is that a carrot and stick approach has been used, with the stick mainly reserved for larger developers who face heavy penalties if they fail to build on useable land.
The idea that developers sit on viable sites unduly so as not to delay housing when they are able to make appropriate profits doesn’t make sense commercially. However, one could argue that flooding a local market with too much housing in a short time frame can disrupt the immediate supply and demand balance, causing values to fall and sales to slow. If sales do not then materialise at the expected pace or values met to achieve the commercial returns required, this can, in turn, adversely impact scheme viability and the financial capacity to move onto the next site.
Are more fines and formal constraints going to aid the same end goal of government and housing developers – that same win-win outcome - to build more homes?
Some might say that the new initiatives by the Government will be welcomed, such as the relaxation of constraints and penalties for smaller developers and intermediate-sized schemes, which form a critical part of the housing development system, ensuring a mix of tenure and scale of sites are available to the market.
Conversely, does the introduction of more fines and red tape for others only inhibit large-scale delivery for all, adding to costs, reducing margins and making it less attractive for developers to be in the housebuilding sector? Surely, making it easier for all to deliver, not harder, is the best way of achieving this mutual end goal.
At Innovus, we undertake a diverse range of services linked to the construction industry and see firsthand the impact of the wider economic factors that are playing a part in the ability nationwide for developers to deliver high-quality and sustainable homes for their clients on time and within budget. By way of example, build cost inflation and supply chain restrictions in recent years have caused significant delays in contractors tendering for works competitively.
There is also currently a shortage of good contractors with capacity in the market, and rising costs mean clients do not want to, or simply cannot afford to, progress with projects and development schemes. All the while, prices have been increasing. It has been an ongoing conundrum and one that can only be solved with central intervention to alleviate the contributing factors.
The Government’s recent initiatives have the potential to unlock significant growth in the construction sector and help solve many of the issues that have been plaguing the market since the 2008 financial crisis.
To deliver on these promises, it is critically important to strike a balance between incentives and penalties for the full range of industry participants, as well as looking to loosen ongoing supply-side constraints. Getting this balance right will help create an environment that is conducive to maximising construction in the years ahead.
