The research was carried out by Dr Nicole Lux, senior research fellow at London’s Bayes Business School, which found that while there are many challenges in the residential development sector, with the right finance solution, SME developers can take advantage of the opportunities.
The UK residential property market is estimated to be worth around £7.2 trillion (IPF, 2020).
Over the past 20 years, the sector has grown by 6% per annum and, although owner-occupiers account for the majority of the stock, the PRS has been growing rapidly and now accounts for circa £1.2bn.
Atelier’s research claims that as a sub-sector, BTR has been expanding quickly, together with the student accommodation market — both of which have become firmly established as separate asset classes and offer significant opportunity with demand still outpacing supply.
With rising interest rates, fewer refinancing options, and the general cost of ownership increasing, it is likely that some homeowners will be forced to sell, which is expected to drive down the price of block sales and land.
According to Atelier, this could present a significant opportunity for SME developers and investors.
Following the September hiatus, we are starting to see a decline in residential land values.
Knight Frank reports that UK greenfield and urban brownfield values fell by 3.5% and 8.5% on average in Q4 2022, taking the annual change in 2022 to -1.3% and -9.2%, respectively.
This decline in land/residual values is inevitable given negative headwinds on sale prices, completion delays, mortgage costs and energy bills.
In addition, the interest costs associated with land banking have risen significantly, meaning the cost of holding land assets is considerably less attractive.
Atelier therefore expects prospects to arise over the course of this year for the purchase of land for development at notably lower values than in 2021/22, as the market adjusts to a new clearing price.
Area for growth
In the big six UK cities outside of London, economic activity — as measured by Gross Value Added (GVA) — has grown by 22% on average over the past 10 years, with similar projections for the next decade.
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While the national average growth is expected to stand at 16%, Manchester is estimated to see the greatest 10-year growth at 25%, with Bristol and Edinburgh predicted to expand by over 20%.
According to the JLL City Price Index, values for new flats in Manchester rose by 4.9% in the year to December 2022.
Last year, the highest amount of starts and completions for residential developments were found in the East Midlands, while activity in London has been stalling.
On the up?
The most noticeable change expected in the next quarter is that upward pressure on labour and material costs is likely to subside.
Atelier believes there are signs (both from a macroeconomic and a sector-wide perspective), that the trough has been reached and passed.
The lender highlights economic outlook, asset class, scale, and location playing an important role in the cost and availability of finance and are factors developers should consider when deciding what to build.
This is where the finance provider expects there are opportunities to provide customised solutions to its clients.
According to the report, student housing development approvals have slowed down significantly since 2020, with demand still outpacing supply.
This is particularly true in key student cities, giving opportunities for mid-size developers.
Atelier recommends acquiring land or conversion and refurbishment opportunities at a discount to previous values (over and above the market decline) and repurposing them to one of the many forms of residential use in demand, such as student accommodation or PRS.
With a lack of potential homebuyers for flats or houses, the BTR market is predicted to grow further with good rental growth prospects.
Commenting on the report, Chris Gardner, joint CEO at Atelier, said: "With the property market, site values, and the cost of finance all going through a period of transition, SME developers — who together build half of the new homes delivered in Britain each year — are facing both challenges and opportunities.
"Over the past 18 months, the rapid increase in base rate, which in May reached its highest level for nearly 15 years, has led many owners to rethink their strategies, contributing to a surge in the number of motivated sellers and, in some cases, forced sellers.
"Our analysis reveals the market is now on the move in response, with an improved balance between buyers and sellers leading to a significant and long-awaited softening of site values.
“These movements could be the key to unlocking new opportunities and the delivery of much needed new housing."