Market trends are aligning favourably for SME property developers in 2024-25

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We’re at the trough of the property cycle, but things are looking up. Learn about the new Planning and Infrastructure Bill, the state of SME property development finance, and continuing demographic trends.

Market trends are aligning favourably for SME property developers in 2024-25

The property development sector has been through the wringer in recent years, but things are starting to look up.  

Market conditions that historically precede an upswing in the property development market have returned: interest rate volatility has subsided, build cost inflation has decreased, and strong structural demand is being driven by historically low UK unemployment.

And, on 17th July, the King declared that Britain’s infrastructure and housing market would receive much needed stimulation in the guise of the new Planning and Infrastructure Bill – to which the property development world reacted with moderated enthusiasm.

After the headwinds of the war in Ukraine, the subsequent energy crisis and the mini-Budget in 2023, we finally appear to be moving out of the cycle’s trough.  

At present, local planning authorities meet deadlines for minor applications in only 10% of cases, and only 1% handle major applications within the legal 13-week time limit. Unsurprisingly, 55% of property developers pinpointed the planning system as the most substantial roadblock in the delivery of new land in the most recent FMB House Builders’ Survey.

Labour campaigned on a promise to construct 1.5 million homes over a five-year period by simplifying the planning process. The plan? To hire 300 new planners, simplify the consent process, and unlock more sites for development by improving land assembly processes.

The new Planning and Infrastructure Bill should therefore be cause for cautious optimism for SME property developers, even as local councils’ grumblings of discontent start to be heard.

Neil Jefferson, the chief executive of the Home Builders Federation, said: “Planning has been the biggest constraint on housebuilding in recent years and the measures proposed will address the main areas of concern by bringing more land forward for development more quickly.”

Optimism should nevertheless be tempered: Jonathan Werran, Chief Executive of the devolution focussed think-tank Localis, points out that “supply chain bottlenecks” and an undersupply of construction workers and planning officers may throw a spanner in the works.

According to the  FMB House Builders’ Survey, limited access to company financing ranks as the fifth most critical obstacle to housing delivery, cited by 42% of property developers.

This funding challenge has not gone entirely unaddressed, however. The past few years have witnessed a surge in creative capital solutions, driven by rising land values, escalating development costs, and the risk-averse stance of traditional banks. In response, developers have increasingly turned to alternative funding methods, including mezzanine financing, joint ventures, crowdfunding, and a greater reliance on alternative lenders to bridge the financing gap.

Nevertheless, cheaper financing appears to be on the horizon: with construction projects typically spanning 18 to 24 months, industry forecasts suggest that by project completion, interest rates will likely have fallen and bank lending will have increased, facilitating easier refinancing and investment exits.

“Now is the time for investors to deploy capital,” says Jacky Chan, head of investor relations at Shojin.

“Over the past two to three months things have stabilised. Costs are not rising as quickly and inflation has normalised. For developers this is very helpful because they can accurately price in their bills cost.”

Similarly, given the extended planning timescales, SME developers should consider securing sites now to be well-positioned when market conditions improve.

The government’s ambitious goal of constructing 300,000 new homes annually has fallen short, with actual delivery hovering around 200,000 residential units per year and the government abandoning formal housing targets.

Indeed, house completions were actually higher from 1975 – 1989 than they are today, despite the government’s efforts to drive supply.

With strong demand being upheld, this supply-constrained market presents opportunities for SME developers.

Market trends are aligning favourably for SME property developers in 2024-25

UK unemployment is currently sitting at one of its lowest levels in five decades, remaining stable at circa 4%, which has generated strong structural demand for acquiring residential property.

And while population growth has levelled off in the past couple of years, domestic household formations still remain a driver of aggregate demand for housing given high divorce rates. According to the ONS, England’s household count is expected to rise from 23.2 million in 2018 to 24.8 million by 2028. This 7.1% increase represents an additional 1.6 million households, averaging 164,000 new households annually.

Property finance advisers are also reporting increasing transactions within the later living spaces and prime serviced accommodation spaces.

Indeed, projections from 2021 suggest the number of individuals over 85 will reach 2.6 million within 25 years, doubling current figures. A recent Savills study highlights a substantial care bed deficit, with a projected need for 144,000 additional beds over the next decade to accommodate the aging population and only 30,000 in the pipeline. This gap indicates a clear trend towards increased demand for senior living accommodation.  

And at the other end of the age spectrum, the build-to-rent sector is expected to maintain its strength.

Market trends are aligning favourably for SME property developers in 2024-25

While we’re currently positioned near the trough of the property cycle, market indicators suggest the early stages of recovery. And if history is anything to go by, this phase is typically followed by a prolonged period of market rebound and growth.

At Hilton Smythe, we understand property developers’ pain points and we are here to talk you through the range of available lending options as you prepare to build your pipeline.

Looking to secure property development finance for your next project?

Click here Hilton Smythe has you covered

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