Residential Development Market

As we enter Q3 2019, while the sun has come out, the challenges around Brexit are becoming increasingly present in people’s minds with Boris Johnson’s new Government promising a no deal Brexit if necessary. The impending deadline for leaving the EU has arguably driven up operating costs within the construction sector, impacting material and labour prices and this, combined with a negative impact on market sentiment within the housing market, has increased the general challenges in the residential development market.

It is therefore unsurprising that data suggests a continued fall in construction starting this quarter, with Construction PMI data suggesting that every subsector of construction, housebuilding, commercial and civil engineering has reported sharp falls in activity in June. New orders have reportedly dropped at the sharpest rate for 10 years for the third month in a row. While this may suggest an air of negativity, the pressure on new housing delivery has never been as high, irrelevant of a cooling market and Brexit uncertainty.

The key constraint on housing delivery, market conditions aside, is the availability of land, of which there is a fundamental shortage and therefore a strong demand. The sector has become increasingly crowded over recent years and, with cheap debt still readily available and increased competition, developers are still bidding competitively and looking at alternative ways to reduce costs in order to provide a competitive edge. A notable strategy in light of increased labour and construction costs has been increased investment in more modern methods of construction, such as Modular. This enables developers to reduce both their construction costs and timelines, therefore significantly improving their cash flow and often enabling them to bid more competitively as opposed to increasing their profit margins.

We have seen a greater increase in demand for sites with sub 100 units as the larger developers venture into the territory typically occupied by the smaller SME developers. This increased competition, from those that benefit from greater economies of scale and a need to keep construction teams busy, has meant that strong land values in this area of the market are continuing to be achieved, with a notable increase in demand for sites with the capability of delivering 50–100 units.

The key constraint on housing delivery, market conditions aside, is the availability of land, of which there is a fundamental shortage and therefore a strong demand

On larger schemes, partnerships between landowners and developers continue to play an important role, often providing opportunities to unlock sites that otherwise would not have come forward and providing set time parameters, thereby accelerating delivery and often spreading the risk for the developers while increasing value for the landowner. However, the planning regime is still hindered significantly by a shortage of staff and political posturing and, in March 2019, the Government pledged to publish additional planning guidance on housing diversification on large sites in response to the Letwin review of build-out rates.

In summary, in the shadow of Brexit, increased construction costs and low market sentiment, there is still a strong demand for land, but it is the quality of the purchaser and the level of due diligence carried out that you are seeking as a vendor in this market.

Anthony Dixon

DL +44 (0)20 7344 2625