During the course of Q1 & Q2 of 2023 our surveyors within various departments are seeing a more challenging outlook to residential development.
Which type of clients are experiencing these challenges?
Vendors – The Agency and Development teams at Parkinson Real Estate are reporting significant shifts in acquisition appetite for all development sites over the course of 2023.
Dan Crawshaw, Head of Agency reports:
Occupier demand for new build properties is still high and similarly there is motivation from developers to fulfil this. There are many hurdles that developers are facing in the acquisition of sites, gaining of planning permission, developing and exiting that have all become tougher in the past 6 months. Their appetite for risk is diminishing and therefore their offered prices are lower than what they were 12 months ago. Vendors aspirations always lag behind and are still someway apart.
Our strategic land-owning clients seem to be happy to wait out the uncertainty being under no compulsion to sell. This stagnates the market and creates a stalemate for transactions, development and regeneration.
Graham Bartlett, Head of Professional Services reports:
Our House Building / Developer clients generally have a longer-term outlook. Their current acquisitions are for either land banking or development in 5-10 years so they’re less concerned with how the market is performing in the short term. I am witnessing the slowing down of their current sites, in terms of enquiries and sales per month. This has impacted their construction output but the majority were reporting the inadequate availability of skilled tradespeople beforehand so this may stabilise that barrier to development in the short term. The implications or ‘Part L’, ‘Future Homes’ and ‘Fire Safety updates to Building Regulations’ are having varying degrees of impact that each of our clients are managing differently depending upon their procurement, development style and exit.
Developers – The Planning and Development teams at Parkinson Real Estate are reporting significant viability concerns for the majority of development sites over the course of 2023.
Mark Smith, Head of Valuation Advisory reports:
The viability appraisals my team are preparing both in terms of planning (for S106 & Affordable Housing) as well as general appraisal for acquisition purposes are needing to be updated on a more regular basis due to the changing markets, statutory requirements and costs.
Over the past decade Local Authorities (LAs) needed to be more flexible in their planning requirements to attract developers to the lower value areas and were more receptive to requests to reduce their S106 & Affordable Housing Requirements. During the two years from Q1 2020 the residential market strengthened and the LAs were able to stand firm on their policy requirements for commuted sums and Affordable Housing percentages.
From Q4 2022 the residential market fell into a period of disarray due to mortgage liquidity becoming both less affordable and more restrictive. In addition, costs that would be expected to increase on an annual basis are now increasing on a quarterly and sometimes monthly basis. We are approaching a period where I expect developers to withdraw from the lower value areas as risk increases but reward diminishes. LAs will be required to revert to flexing their policy requirements to encourage development in the lower values areas.
In contrast to the lower value areas, Manchester City Centre continues to expand and gentrify once deprived areas. The demand for residential development land in Manchester, Trafford and Salford remains high due to occupational and investor demand. Those three LAs recognise these market factors and negotiate from a position of power when attaining S106 payments and Affordable Housing percentages.
What is Causing these market challenges?
Residential Property Values & Transactions
Hometrack released the July 2023 residential sales market research report which reported the following:
- Demand Falls 18% as Mortgage Rates Spike Higher
- House Price Inflation Slows to +0.6%
- Markets With Prices Over £300,000 Most Exposed to Falls
- Affordability and Strength of Local Economies Important
- Asking Price Cuts Point to Lower Achieved Prices in H2
- Shift in the Mix of Homes Selling Towards Smaller Homes
- Outlook For H2 – On Track for UK Price Falls of Up To -5%
Finance, Mortgages & Liquidity
Liquidity doesn’t appear to be as much of an issue compared with the property crash of 2008/2009. The Bank of England’s attempts to reduce inflation by increasing the base rate to 5.25% has had a significant impact on mortgage rates. Affordability is at the forefront of all borrowers’ minds as their rates have in some cases increased by 5% overnight. This impacts both owner occupiers and investors with many investors withdrawing from the market due to the inadequate yields now provided by property investment.
Relatively positive news is that our Bridging and Development finance clients aren’t drawing from London finance markets and draw from private funds so their rates have remained relatively stable.
Inflationary pressures are affecting constructions costs. The ONS are reporting inflation currently runs at 7.9%. Covid and the war in Ukraine drove prices to unprecedented levels, but those pressures seem to be subsiding and being overtaken by inflationary pressures. Inflation is expected to reduce over the short term, but we are unlikely to feel any great benefit as labour costs are expected to rise in 2024.
Financial appraisals have typically accounted for a 1-3 month pre planning stage, a 1-3 month construction lead in and a 12 -120 month construction period. For ‘estate style’ residential development we saw schemes achieving 7-8 completion and sales per month. This has reduced over the last three quarters. Generally, the small schemes in more affluent areas have maintained good levels of completions and sales rates, however, the lower value areas haven’t fared as well. We have seen reported average completions and sales reducing to as low as 3 per month. There are obviously seasonal variances that contribute to these figures but the mortgage rate rises and inflationary pressures are commonly reported to be the cause.
In short… Reducing Values Vs Rising Costs
The UK entered a new economic phase in Q1 of 2023, with expected growth being so low (less than 0.5%), that to most, it will feel like a mini recession. The shortfall in real disposable income for the many will continue which will have knock on effects to the wider economy and real estate market.
Demand will remain high for occupation, and in its true sense, purchase but this will be tempered by the ability to complete a purchase by many owner occupiers.
We hope the delta between vendor aspiration and purchaser requirements narrows, but unlikely in the short term
To discuss your viability requirements, please contact Mark Smith for further details:
Mark Smith BSc (Hons) MRICS
RICS Registered Valuer
Director – Valuation Advisory
M: 07796 825618