Covid, construction and balancing Brexit

Brexit — remember that? It was the hot topic before the global pandemic, but one that’s now appearing to kick the construction industry where it hurts. Add to that the dreaded Covid word and we have a perfect storm for developers.

The UK exiting the EU was always likely to provide some challenges to the construction industry. The departure of both skilled and unskilled labour from the UK was inevitable, albeit possibly not on the scale seen to date. However, once the adverse impact of Covid was thrown into a high-demand environment, the supply chain hit breaking point.

Lower production caused by staff shortages struggling with illness and quarantine obligations — as well as widespread curbs on people movement, transportation, and a significant shortage of delivery drivers — has resulted in significant shortages and availability of the distribution of key construction materials, such as steel, cement, timber, and plaster. It’s therefore hardly surprising that we’re seeing dramatic price increases across the board.

Yet, despite Brexit and Covid, the underlying dynamics of the housing market in the UK remain strong. This has been evidenced by a boom in demand (and subsequently, prices) for residential properties across the UK, which has been caused, in part, by a lack of stock.

Considerably more housing is required than is currently being built, and this is likely to have further cumulative impact on availability over the coming months. With the addition of more development finance in the market than ever before, supported by the lowest base rate in UK history, this would suggest a great opportunity for developers.

With a struggling economy and, what appears to be an ever-increasing debt pile, construction remains a vital part of the UK’s recovery, employing hundreds of thousands of people both directly and indirectly, and a key generator of millions of pounds for the treasury. ‘Build, build, build’ is key to getting the economy back on its feet — and quickly.

That said, caution remains among some developers. We regularly hear the challenges our developer clients are facing with regard to shortages in supply of land, materials, and labour, together with the consequential price rises. There remains ongoing uncertainty over the current heat in the residential market and how the government’s withdrawal of its support programmes (loan schemes, furlough, 95% mortgages), together with the end of Help to Buy, will impact demand for housing and its affordability. The ultimate question is whether an adjustment in the residential market is coming and, if so, when?

While some uncertainty remains, it’s the experienced developers who are able to navigate these waters most effectively. Adapting to changes in the market is nothing new and planning ahead ensures security of supply at the best prices and minimised interruption. The challenge for our clients — who typically are smaller by their very nature — is that access to some land, labour, and certain parts of the supply chain, can be difficult because they don’t have the buying power of larger operators. Paying a higher price for goods and services is therefore also inevitable.

How can development lenders help?

We see the challenges that our clients are facing and understand them. We have always worked closely with our clients at Hodge, and there’s nothing like a global pandemic to allow us to get to know our customers and projects even better. Developments are taking longer, costs are increasing, and certainty of supply is less than in the pre-pandemic world.

We recognise that development funders are experts in finance, not experts in development.  We rely on our professional advisers for assistance where it is needed, and are regularly updated about progress on site but, ultimately, the best people to deal with challenges in the development world are experienced developers themselves.

As a result, we continue to work alongside our clients to provide longer timeframes for completion and sale, together with facilities that support the increased cost of development.  Slightly larger contingencies can sometime be a source of conflict between developer and funder, but it can also afford the developer much needed capacity — should it be required.

Having strong, open, and honest relationships with our clients is vital to a successful development — and this has always been a key part of who we are as a funder, and I don’t see that changing any time soon. The last 18 months have shone a light on just how important communication is and how valuable these relationships are.

The future

While my crystal ball is a bit jaded from the last two year’s use, I would expect production and availability of materials to normalise over the coming months as restrictions and limitations caused by Covid continue to reduce. I would also expect an element of stability to return to pricing and some of the dramatic increases should also start to level out.

However, demand for these products and materials doesn’t seem to be waning and, in reality, it’s only likely to increase. This suggests that a price reduction in the short term is extremely unlikely, but more the rate at which they rise is likely to slow, with stability coming at a higher level. I suspect it would be wise for both funders and developers alike to prepare for this as part of the development process.

Whatever happens, it’s clear that partnerships, collaborative working, and strong communication is at the heart of successful development funding, to ensure that we support one another through this tricky time so that homes can be built and the demand supplied.

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