Keith Thomas FRTPI FRICS runs the Online CPD Masterclass “Introduction to Development Viability and Finance”.
Last year we all faced tightening budgets, rocketing interest rates affecting new and remortgages, a slowdown in housing sales and pressure on development finance. Soaring inflation was also impacting build costs resulting in many projects being mothballed and stalling across the UK. Although there are signs of things easing as we enter 2024, much of the previous high inflation is now baked into future development costs. At least the starting estimates can be viewed with a greater level of confidence as inflation slows and looks likely to stabilise to around 2% per annum during the current year – ahead of previous expectations.
Bank of England Base Rate – the level against which all borrowing costs are benchmarked – has finally stabilised at 5.25% with many commentators anticipating a possible cut in the next review due in February. New mortgage offers have improved substantially in recent months which is good news for those coming off previous fixed terms but loan to value ratios mean many new purchasers need larger deposits to secure the better interest rates on offer.
The marginal improvement in mortgage offers will begin to filter through into sale transactions into the Spring and hopefully bring much needed confidence to the housing development market. The combination of slow sale rates, and continued pressure on sales values of course all lead to a dampening of development viability. The longer a scheme takes to build out, the more the developer is exposed to potentially high finance costs. Any reduction in expected sales value and overall Gross Development Value (GDV) directly impacts profitability, putting further pressure on developers.
Most developers will now set high margins before taking on any new developments to reflect the risk and uncertainty in the marketplace. Developers will also be acutely aware of any significant reduction in GDV could also put them in breach of their finance agreements incurring penalty charges or even forcing them to re-finance at higher rates. However, far more flexibility is emerging in the development finance market with broader mix of debt and equity-based finance on offer. Whilst this may dilute the overall developer return it may be a sensible approach to provide greater certainty on funding and to spread development risk.
The complications in the development market don’t make the job of the viability appraiser any easier. National planning guidance attempts to oversimplify the appraisal process. The task really is much more than simply putting numbers into a model to see what the computer says. More than ever, it is imperative to understand the intricacies and inter-relationships of all inputs and assumptions, to follow the “knock-on” effect of any changes and stress-test everything through comprehensive sensitivity analysis.
We herald another CPD training programme in 2024 where I will be providing planners with an “Introduction to Development Viability and Finance”. In this Online CPD Masterclass, you will learn a careful and practical application of common sense in the context of the wider financial, economic and political challenges underlying the art of the development appraisal process.
Please browse in the CPD Masterclass Calendar for the next upcoming date for ‘Introduction to Development Viability and Finance’.
