Newsteer’s Jonathan Glaister shares his views on current challenges and ways to improve the viability of residential developments in the current market.
It’s no secret that the property market is facing some difficult challenges, all of which could have a significant impact on the Living sector. Inflation is one major macro-economic headwind, exerting pressure on household budgets. Though inflation appears to have peaked, the Bank of England (BoE) may need to raise interest rates further in 2023 to reach target levels. However, recent stress in the banking system has made the path more uncertain.
Unemployment may be low at the moment, but the impacts of higher rates are yet to fully filter through the economy. The mortgage market has stabilised following the mini budget in September, with five-year fixed rate mortgages now available at below 4% to borrowers with lower LTVs. However, according to the Office for National Statistics, the majority of fixed rate mortgages in the UK (57%) due for renewal in 2023 were fixed at interest rates below 2%. For many, monthly payments are going to increase significantly this year.
Commentators are widely predicting that UK house prices will fall by 5% or more in 2023. A slowdown in residential sales rates is one factor that has caused the value of residential development land to fall in some areas of the UK. However, scarcity of sites in some markets such as London has meant that land values have held up which puts further pressure on viability.
Despite recent upward revisions to UK GDP forecasts, the outlook is still weak. All of these factors are likely to have a knock-on effect on house prices, creating major viability challenges for the Living sector. Current challenges include:
- Significant increases in construction costs
- Slower pace of sales at lower prices which are potentially set to fall further
- Higher lending costs
- Limited land price reductions due to supply shortages.
We also have development specific challenges to contend with:
- Government consultation considering rules to mandate second staircases in new residential buildings over 30m. This would be in addition to previously updated building regulations, adding cost to a development.
- Continued planning policy and political pressure to provide levels of affordable housing set during more favourable economic and development market conditions.
- New (increased) Community Infrastructure Levy (CIL) rates in some local authorities and significantly higher indexing rates due to the increases in the BCIS All-in Tender Price Index.
- In some cases, authorities are unwilling to take a scheme through to planning committee without a policy compliant or fast track affordable housing offer on the basis Members will simply not support the proposal.
Is there a solution to this rather gloomy scenario, we hear you ask!
Newsteer’s Viability team are experienced in optimising developments to maximise our clients’ returns and have an excellent track record of delivery. We work in partnership with our planning team to provide clear, commercial advice throughout the feasibility stages, planning process and beyond.
Our team can assist with a range of services, from advising on affordable housing and viability policy and politics, to assessing the quantum and tenures of affordable housing that a development can support using a Financial Viability Assessment. We also assist in S73 applications and S106 Agreements, negotiating with the LPA and/or their advisers. We work with clients and project teams to help justify increased height or density and any divergence from policy unit mixes, advising on the value of affordable housing, grant funding and maximising sale receipts from Registered Providers. We also have experience in building the case for a CIL Exceptional Circumstances Relief application and the preparation of review mechanism submissions once triggered.
Despite the current challenges that are impacting the property market, Newsteer is here to provide clarity, support and advice to improve development viability. Our end goal is to help our clients optimise their development to maximise returns, through a transparent, collaborative process from our dedicated team.
Viability Experts. Viable Results.
For further information or to discuss financial viability of your next development project, contact Jonathan Glaister
The Living Sector is synonymous with the places in which we live and call home. From your first student digs to later living, it spans our whole lifecycle. It’s intrinsically linked to a range of commercial sectors – supporting and complementing the activities and amenities which come together to shape places. It’s where you live, work, shop, leisure and are entertained. It’s an ecosystem – a neighbourhood.
At Newsteer, we bring all the positive principles of a good neighbourhood, enabling individuals to fulfil their goals and potential as part of a strong, supportive collective. We have a strong track record of working together and with our clients to identify and assess the opportunities and challenges that the Living sector presents.